Twitter shares have gained a bit of ground in the early days of 2015, after losing nearly half of their value in 2014. But Dan Nathan of RiskReversal.com says there's still plenty of time to get in on the stock, given the nascent possibility that the company will be acquired.
Thus far, investors have been sorely disappointed by Twitter's meager growth in monthly active users. Recent numbers show that the company is adding monthly active users more slowly than Facebook, despite the fact that Twitter is a younger and much smaller company.
But Nathan, who recently bought shares of Twitter, maintains that the company is "tremendously interesting, and I think a very early stage social media platform."
He says that Twitter is "massively undervalued" at a $25.6 billion market cap, given that its unique importance as a social media platform gives it "scarcity value" as well as "potential synergies with a much larger player in the space—and that player is Google."
Google, after all, is sitting on $62 billion in cash and marketable securities, making Twitter a doable acquisition. And with Twitter becoming a more and more powerful search tool, it isn't difficult to imagine that meaningful synergies would be out there.
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To take advantage of such a takeout, Nathan would suggest buying the March 35/45 risk reversal for 30 cents a share. If Twitter shares (currently trading at $40) stay within that $10 range, the buyer of the options combination (which is put on by selling the 35-strike put and buying the 45-strike call) will be out 30 cents per share. Once Twitter falls below $35 or rises above $45, profits and losses mimic a regular long stock position.
Such a structure makes sense for playing Twitter because the company's downside is limited, but potential upside is significant, Nathan said.
However, one potential issue with the trade is the timing, given that it is only in effect between now and March 20.
One analyst who covers the company says an acquisition, if it comes, is likely more than a year away. After all, Twitter is the most expensive Internet stock on a multiple-to-sales basis, meaning a potential acquirer like Google could be better off either waiting for the company to grow into its valuation, or for its stock to get cheaper.
Neither Twitter nor Google immediately responded to emailed requests for comment.
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