MorningWord 4/10/15: Bye Bye Birdy? $GOOGL, $TWTR

by Dan April 10, 2015 9:45 am • Commentary

Yesterday on CNBC’s Power Lunch I was part of a discussion about whether or not Google (GOOGL) should purchase Twitter (TWTR), watch here:

Here were my notes to the producer of the show prior to the hit:

This is fairly well known, but Google’s dominance in desktop search is being challenged by secular computing shift to mobile devices.  It’s also well known that ad monetization comes at lesser profitability on 5 inch screens than on 13 inch and larger computer screens.
Google has a few massive blind spots in my opinion:
1. Real time search, at the moment being dominated by Twitter.
2. Lack of Social Media property, aside from Youtube. Youtube would benefit dramatically from videos having a built in social platform for sharing, as opposed to using others, like Twitter.
3. Mobile Messaging, competitors like Facebook have spent aggressively for platforms like Whats App.
SO Twitter checks a lot of boxes for Google where Google is lacking.  Could the company use a portion of their $67 billion and use stock to buy them TWTR for $40 billion, sure… Will they? I suspect they would out of a position of weakness rather than strength.  It’s my view that Twitter’s stagnant user growth could be accelerated dramatically as a part of a greater property like Google. 
Sure MSFT could buy TWTR, but far fewer logical synergies.   Link up with YHOO could make sense, but culturally would be an odd fit and very unclear who would be running the show but could fit in with CEO Mayer’s interest in taking on Google.  
I own TWTR, and have since high $30s, but I am not sure TWTR can get to 500 million active users on its own this decade, investors could lose interest despite the uniqueness of the property.

I obviously have no idea if a deal between Google and Twitter will happen (it’s been speculated about for years) but I think it is safe to say that Twitter will take decades to get to the sort of critical mass of a Facebook with its current user growth and Google is facing increasing competition from seemingly an endless list.

Business Insider has had a few interesting posts this week which has highlighted some of Google’s vulnerabilities:

Google dominates the past, not the future — and that raises serious questions about the company

Facebook just filed a fascinating patent that could seriously hurt Google’s ad revenue

It’s my guess that if Google were to make a $40 billion cash and stock bid for Twitter, their market cap would possibly rise by that much, or about 10%.  The company does not buyback stock, or pay a dividend, which suggests they have better ideas for the uses of their cash. Ensuring relevancy in an increasingly social/mobile world would be a great start.  Since Facebook agreed to pay $22 billion for WhatsApp more than a year ago, their stock has risen 30%, gaining more than $60 billion in market cap.

Google stock during that time period is down a few percent.  Just saying.  It’s my view that they both need each-other.