AT&T (NYSE: T) has proven the adage 'Content is King' with its $85 billion bid for Time Warner (NYSE: TWX). The $226 billion media distributor has access to over 100 million subscribers across wireless, internet, and video but needs an endless array of programming to fill that pipeline.
But content doesn't just mean original video programming. It's any information created regularly that brings potential customers back to the distribution channel.
That wider definition makes social media networks the most sought-after content creators available. Social media content is user generated so it costs nothing to produce. It's also interactive and personal, two ideas traditional video content struggles with on its one-way feed.
We've already seen the value of this social content in Microsoft's (Nasdaq: MSFT) planned $26.2 billion acquisition of LinkedIn (NYSE: LNKD). Not only does the business networking platform promise an endless supply of content, but also its own distribution channel through which Microsoft can integrate its suite of office tools.
Now buyers have their sights set on other social media platforms and I've found one that could more than double in value based on recent acquisition deals.
Twitter May Not Be The Only Social Media Target
Shares of Twitter (NYSE: TWTR) spiked 76% after my May article when rumors of an acquisition were floated around Wall Street. Potential buyers included SalesForce (NYSE: CRM), Alphabet (Nasdaq: GOOG) and Disney (NYSE: DIS), though no one has yet stepped up to the plate.
Revenue at the 140-character social leader continues to grow even as user growth slows. The company announced massive job cuts during its third-quarter report on the hope of improving profits and possibly drawing bidders back to the table.
While Twitter could still be in play, I think there is another social network that could be an imminent target.
Yelp (NYSE: YELP) is the LinkedIn of small business with its 142 million monthly desktop and mobile users plus an additional 23 million monthly app users. Over Yelp's 12 years of operation, users have created 108 million reviews for local businesses and the company now generates $629 million in annual revenue.
While user growth has been an issue at Twitter, Yelp continues to do well, especially on mobile devices. The number of mobile smartphones accessing the app jumped 27% to 23 million in the fiscal second quarter from 18 million in the same quarter last year.
Just $23 billion of the estimated $151 billion in 2016 local ad spending will be through online and mobile ads, even as ecommerce continues to grow at more than twice the rate of traditional retail. As more people turn to online local searches, Yelp will play an even larger role in discovery and advertising. Yelp now has a mobile reach of 38% among U.S. smartphones, higher than TripAdvisor (Nasdaq: TRIP) and Groupon (Nasdaq: GRPN).
Yelp has $398 million in balance sheet cash against just $14 million in debt. That's 15% of the market cap in net cash. The company also generates $21 million in free cash flow annually. Management expects to grow revenue by 28% to $704 million this year and to triple the margin on earnings before interest, taxes and depreciation (EBITDA).
Despite its strength in growth and its potential as a social media powerhouse, Yelp trades for price multiples well under those paid for recent acquisitions.
The table below shows M&A activity in social media along with acquisition multiples on sales and users. I've included an estimate for the Twitter valuation at its early-October price, which would have valued the company very closely to closed deals.
Shares of Yelp trade for just 3.5 times trailing sales and 15.4 times its user base. Both of these multiples are less than half the price paid for social media acquisitions over the last several years. In fact, Yelp shares trade for less than a quarter of what Microsoft paid for LinkedIn's user base.
Yelp changed from a dual-class share structure in September, something that could have kept acquirers from making a bid. In fact, it may have done so as a way of drawing out bidders. The company may not get an offer for twice its current share price, but it could easily see a 30% premium or higher as others rush to add social media content to their models.
Risks To Consider: Yelp has not said whether it would accept an acquisition offer, which could force any bidders to attempt a hostile offer.
Action To Take: Position in front of a potential acquisition bid by going long shares of Yelp based on strong fundamentals and a great valuation versus recent deal multiples in the social media space.
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