Citi Analyst Sees 40% Downside Risk for Twitter

Social media giant Twitter Inc (NYSE:TWTR) recently surged on takeover rumors, but Citigroup analyst Mark May isn’t buying into the hype.

May said in a note to clients this morning that it’s unlikely the company will find a suitor willing to pay a big premium for a money-losing company with stalled user growth:

As a result of Friday’s move, we now believe that the risk-reward skews to the downside for TWTR. While we see some strategic rationale for certain companies to acquire Twitter, the company’s struggles and steep valuation make a deal at a meaningful premium – especially from here – less likely in our view. At the current price of ~$22.50, a potential $26 bid (source: CNBC, unsubstantiated) would represent ~15% upside, but should a bid not materialize we think the stock could retest the lows of late May (~40% downside) given the company’s stagnant user growth, deteriorating financials, and the likelihood of even further downside to consensus forecasts.

A 40% downside from current levels would send TWTR all the way down to $14 per share. It’s not all bad news for the company in the short term, however:

That said, in the absence of a near term deal, TWTR is likely to continue to trade with some sort of M&A premium. All said, given the fundamental challenges and steep valuation and given the speculative and uncertain nature of M&A, we maintain our Neutral rating.

The list of companies rumored to have interest in buying Twitter seems to be growing by the day. Initial reports identified Google, Salesforce.com, Verizon, and Microsoft as possible suitors, and Disney even joined the mix yesterday.

Should a deal fail to materialize, however, it’s likely TWTR shares would crater, and the company would probably look to quickly replace CEO Jack Dorsey.

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Twitter shares were mostly flat in Tuesday morning trading at $23.32. Year-to-date, TWTR has risen 2.03%, after reversing steep price losses earlier in the year amid takeover speculation.