This article was originally published on Fool.com
WASHINGTON, DC Is Google (NASDAQ: GOOG.US) (NASDAQ: GOOGL.US) planning to buyTwitter (NYSE:TWTR.US) soon? Recent rumours suggest that its possible, based on reports that Twitter has hired Goldman Sachs to fend off takeover attempts.
This isnt the first time weve heard about Googles interest in Twitter. Back in 2009, Google was reportedly in late-stage negotiations to buy Twitter for $250 million. In early 2011, rumors suggested that Google, Facebook(NASDAQ: FB), and several other companies offered to buy Twitter for around $10 billion. This January, new reports claimed that Google could make an even higher offer.
The logic behind a Twitter takeover is simple. Googles previous social networking efforts Orkut, Buzz, and Google+ have been dwarfed by Facebooks 1.39 billion monthly active users (MAUs). Facebook is capitalising on that lead with its own video-hosting platform, location-based services, payments platform, and other services. Its tethering more third party sites and apps to its ecosystem with single sign-ons, which collect data for targeted ads. Since that growth threatens Googles ecosystem of ads and services, it desperately needs a social solution to widen its defensive moat against Facebook.
If Google acquires Twitter, which now has a market cap of $34 billion, it would be its largest acquisition ever. But in my opinion, its not worth that lofty price tag. Lets take a look at three reasons the deal would be a huge waste of money for Google.
1. Its expensive
Twitters revenues more than doubled year over year to $1.4 billion in 2014. However, it reported a net loss of $645 million, up slightly from a loss of $578 million in 2013.
Last quarter, Twitter reported a net loss of $125 million, which was mostly attributed to $177 million in stock-based compensation. But surprisingly, those hefty bonuses still couldnt prevent Twitters chief operating officer, chief financial officer, head of news, and head of engineering from all leaving within the past 15 months.
Twitter stock is also overvalued at current prices. Twitter trades at 24 times sales, compared to Facebook and LinkedInsP/S ratios of 18 and 14. This means that Twitter could be bought at a cheaper price if fundamental gravity kicks in.
2. Stagnant user growth
Twitters MAU growth has slowed down considerably over the past year. Back the fourth quarter of 2013, MAUs rose 30% year over year to 241 million. But in the fourth quarter of 2014, MAUs only grew 20% to 288 million.
A recent survey by Pew Research Center also found that just 23% of American adults use Twitter, placing it in fifth place behind Facebook, LinkedIn, Pinterest, and Facebooks Instagram, in that order.
In January, Twitter disclosed that 24 million of its users have never tweeted, meaning that they could be robots, third-party apps, or spam accounts. Moreover, theres a huge gray market for sales of fake followers, which are created by algorithms and sold by the thousands to attention-seeking Twitter users. These problems damage Twitters reputation as a social network and advertising platform.
3. Google already has decent access
Twitter previously prevented Google from listing tweets in its search results. But in February, Twitter signed a deal with Google to bring tweets back to Google searches. Twitter stated that the deal would encourage new users to sign up, that it could monetize the landing pages with ads, and that it would generate additional data revenues by sending the tweets to Google.
However, the deal arguably benefited Google more than Twitter. The partnership lets Google users bypass Twitters revenue-generating News Feed and jump straight to the tweet. Therefore, Twitter users who regularly use Twitters internal search engine could start using Google to simultaneously scour tweets and other websites. Googles search results will also be enhanced by real-time tweets, which will boost the relevance of its targeted ads.
Since that deal basically gives Google access to some of Twitters best features, theres no point in buying the entire site.
Twitters not worth it, Google
Googles 10 largest acquisitions in history had a combined price tag of $24.5 billion. With an acquisition premium, Twitter could cost $40 billion to $65 billion. Thats a whopping price tag for a company with no profits, high valuations, and stagnant user growth. Google certainly needs to push back against Facebook in the social media space, but buying Twitter just isnt the answer.
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Leo Sun owns shares of Facebook. The Motley Fool UK owns shares of Google (A shares) and Google (C shares).