MorningWord 10/20/16: Delete Your Account on the Way Out

by Dan October 20, 2016 9:48 am • FREE ACCESS

Regular readers of RiskReversal, viewers of CNBC’s Fast Money & Options Action and my followers on Twitter are likely familiar with two of my adamant leanings in 2016, one having to do with the election and one having to do with the best hub for real-time information on the election. First, I have not, and continue to think Donald J. Trump is not a good choice for President of the United States. Second, I have thought, and continue to think Twitter (TWTR) is a massively under-valued media property / technology platform for two reasons, comparative valuation given its scarcity/ replacement value, and relative value to other social media properties like LinkedIn (that recently agreed to be purchased by Microsoft for $26 billion, nearly 7x sales despite heavy GAAP losses like TWTR) & SnapChat (which is currently looking to IPO near a $25 billion market valuation (likely 50x trailing 12 month sales, 25x expected 2017)).

Yesterday I received the following question on TWTR. It appeared on Twitter of course:

My view on TWTR has not changed since Oct 7th, when the stock was just below $20, down from $25 days earlier as the supposed bidding war for TWTR fell apart:

the risk/reward of buying the stock near $20 and making out ok through earnings without a bid isn’t great. But if there is renewed takeover speculation, I do believe that management and the board are not likely to allow a sale below their IPO price of $26.

I would be a buyer of the stock in the mid teens regardless. Which leads me to how I might structure a take-out trade by mid December with the risk of downside on earnings and/or no specific takeout offer. To do that I would use a risk reversal, selling an out of the money put to buy an out of the money call

So here is the deal. It looks like you can put a fork in Trump for President. Last night’s debate performance was a disaster for his candidacy (the main headline is that he’s unwilling to admit he’d concede the election) when he needed a miracle.

But back to TWTR. Would Trump even be a major party candidate for President if Twitter as a platform didn’t exist? After losing his mainstream media platform (and successful image makeover) with The Celebrity Apprentice Trump risked disappearing into the ranks of other reality TV stars. But with the Birther movement keeping him in the spotlight with certain segments of alt-media he was then able to strike a chord with millions of people across the country with a populist message emphasizing a rigged game against them that only he could fix. One of the early premises of his candidacy that resonated (especially against career politicians), was that he couldn’t be bought, promising to spend up to a billion dollars of his own money on his candidacy (he has spent less than $60 million of his own money so far with just 3 weeks to go).

Despite what most would agree was a very poor ground game and political organization, Trump steamrolled through the Republican primary. A huge part of that was an unfiltered direct connection to potential voters (and more importantly a conduit to the mainstream media) that had him dominate the news cycle for the past year (for good, then ultimately bad). Simply put, the platform propelled is candidacy. (The official Clinton campaign coordinated a more traditional social media approach, also focused on Twitter for messaging and video, but more “meme-centric” in an attempt to win over reluctant Bernie supporters.)

TWTR has an enterprise value of $10 billion (market capitalization, less cash net of debt… 4x ev/sales… LNKD near 7x)/ That’s also the number that Trump claims as his net worth.  If we were playing would you rather, I’d much rather own Twitter for $10 billion (reasons here, here, here, here) than Donald Trump’s $10 billion empire/brand at this point because despite his apparent ambition to create Trump TV, his brand is at serious risk of being marked down significantly after the election. From re/code:

The technology to get a video subscription service up and running is now easy to master, and Trump has a large base of potential subscribers to convert. If he gets a sliver of them, it’s a real business, as Glenn Beck once proved with his Blaze network.

The problem with the Glenn Beck model is that it’s a model. So far, no one has been able to come close to reproducing the success Beck had at his height, when he claimed that 300,000 people were paying him $10 a month to watch him.

Sarah Palin tried and failed. Howard Stern could have tried it but chose to stick with a guaranteed paycheck from Sirius XM.

Trump is betting on a “narrow-casting” model to replace what was a mainstream media platform he had on Celebrity Apprentice. But here is the irony. Trump’s use of Twitter helped him to ascend to the top of the GOP ticket. Even though it was a crowded field and you could argue his path through the primary was also based on “narrow-casting” to a very loyal segment of GOP voters while the more mainstream candidates like Bush, Rubio and Kasich split the rest, that still resulted in an election where party loyalty (and negative party ID towards Clinton) will still likely hand him about 40% of the vote on election day. That’s a lot of people!

I know these are Apples to Orange, but if the use of Twitter’s product and platform can help a guy like Trump come back from a network show cancellation and become a major political party’s nominee to be President, I am sure we can agree that their are far greater things in store for Twitter, as a product, a platform and a company.