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Twitter, Fitbit Have Significant Upside As Targets For Larger Consumer Tech Ecosystems

Summary

TWTR and FIT make attractive acquisition targets with limited growth potential as a standalone, but innovative products in markets that are highly attractive to deep pocketed consumer tech competitors.

"G5" consumer tech companies fiercely competing with each other for ecosystem dominance. Could drive price higher as companies target consumer depth of experience, keeping assets away from others.

TWTR's most likely suitor could be GOOGL, with MSFT and several large media companies as possibilities.

FIT's most likely suitor could also be GOOGL, but AAPL, MSFT and several smartwatch manufacturers (SNE, Samsung) could be close behind.

Twitter (NYSE:TWTR) and Fitbit (NYSE:FIT) are two consumer tech companies that have stood out to me as clear acquisition targets from the time of their IPOs. I've been surprised that they've remained independent for so long. Their road may soon be coming to an end as growth has slowed and opportunities are limited in the face of fierce competition.

The consumer tech landscape is populated with five megacap behemoths creating giant ecosystems of users, products, and services. In May 2011, Alphabet (NASDAQ:GOOGL) Chairman Eric Schmidt dubbed GOOGL, Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) the "Gang of 4," to which I'd add Microsoft (NASDAQ:MSFT) as the five companies dominating the present of consumer tech and fiercely competing against each other to control the future of consumer tech. Companies like TWTR, FIT and many others have developed strong ecosystems in their own right, but in the face of the "Gang of 5" or "G5", they're relegated to also-ran status and their ultimate potential is far more limited.

While there is a likelihood of significant stock appreciation if TWTR or FIT were to be targeted, how much depends on who's doing the bidding. The value of TWTR to GOOGL isn't just the value of TWTR, but both the potential of TWTR to create synergies and value across the existing GOOGL platform (adding users and becoming more ingrained in people's lives), as well as the value in keeping those benefits out of the ecosystem of a competitor like FB or MSFT. Thus, as we've seen time and time again within tech, a company like TWTR or FIT could be bid up to a point far higher than current valuations (or than modeling could justify).

TWTR stock rose +5% on Wednesday after co-founder Ev Williams told Bloomberg TV: "We're in a strong position now, and as a board member we have to consider the right options." Earlier this month, TWTR rose +9% after rumors relating to a possible acquisition from MSFT. For years I've suggested that TWTR would be better off partnering up with someone else, a sentiment shared with many other analysts and industry observers. The company just doesn't have the platform or usage to optimize revenue and profits as a standalone entity; however, its value is potentially much greater as part of a larger ecosystem where cross-product promotion and usage could drastically increase exposure and engagement. FIT is in a similar situation, having created an industry...


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