Chances Of A Twitter Buyout High, Odds Of A Premium To Current Price Not So Much -Loop Capital

The reason cited is its relative valuation to faster growing peers and strained capacity of buyers — except Alphabet Inc GOOGL GOOG.

On the valuation front, the brokerage noted that TWTR is trading at 5.5x EV/Sales, 19.4x EV/EBITDA and 46.5x P/E on 2017 estimates and up almost 30 percent in the past five weeks. A large group of Internet peers are currently trading at an average of 3.7x, 15.3x, and 31.5x, respectively.

Related Link: Salesforce Could Have A Hard Time Getting Shareholders To Vote For A Twitter Buyout At Its Current Price

For comparison, the brokerage said Facebook Inc FB trades at 16.2x EV/EBITDA and 25.2x P/E and is expected to grow revenues 51 percent in 2016 versus 15 percent for Twitter. Microsoft Corporation MSFT paid LinkedIn Corp LNKD 5.3x EV/Sales, 18.4x EV/EBITDA and 42.6x P/E. LinkedIn is poised to grow revenues 25 percent in 2016 and offers more value than Twitter.

"We have no doubt that Twitter's bankers and board can justify a $20 billion ($28/share) or greater price tag for the company, but we don't believe it passes a common sense test for a management team and board to sign off on such a price tag and justify it to their shareholders," analyst Blake Harper wrote in a note.

Possible Interested Parties

Meanwhile, Harper believes Alphabet is the "best positioned" bidder for Twitter as the other two rumored suitors, salesforce.com, inc. CRM and Walt Disney Co DIS, would need large debt and share issuance to get the deal done.

"Plugging Twitter's content into Google makes sense, although its desire is more questionable. With $74 billion in net cash, it is the best positioned bidder for Twitter, currently valued at $17.6 billion," Harper highlighted.

In addition, salesforce could use Twitter's data to provide unique insights to its corporate customers, while Disney could exploit Twitter's video streaming capabilities to complement its live TV. But, both companies have large debt — $1.3 billion and $15 billion, respectively.

Rating And Justification

Meanwhile, Harper reiterated his Sell rating and $18 target price saying the swiftness at which Twitter began shopping itself indicates another disappointing earnings is on the cards.

The company is scheduled to report its third quarter earnings on October 27. The analyst expects 315 million MAUs versus consensus at 316 million MAUs and sees revenue just below the consensus of 6.4 percent year-over-year revenue growth, which compares to 58 percent in the same quarter last year.

"Twitter would like to announce a deal before then but we believe investors would be better to sell shares ahead of it," Harper added.

Shares of Twitter plunged 18.94 percent to $20.16 on the prospect that the social media company may get a bid lower than its share price.

Full ratings data available on Benzinga Pro.