The article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Disney Stock Prediction

Rumor has it that Disney is one of the firms interested in buying money-losing Twitter.

It is alleged that Disney’s interest is to use Twitter to promote its content library. I say this can already be done now without buying Twitter.

I will dump my DIS shares if Twitter really gets bought by Disney.

Twitter will only drag down Disney’s bottomline. Disney will also have to borrow a lot to finance a $22 billion to $30 billion buy-out of Twitter.

Disney has a negative YTD yield but algorithmic forecasts from I Know First are saying it is worth going long on Disney now.

I’m long Disney (DIS). It bothers me to read online reports that Disney is allegedly one of those firms interested in buying Twitter (TWTR). My fearless forecast is that Disney purchasing Twitter will only repeat the AOL (AOL) – Time Warner (TWC) merger disaster. Twitter’s lingering losses and weakening user engagement is akin to AOL’s dial-up internet service dying from the rise of Cable/DSL broadband internet service.

It was reported that Disney’s interest in buying Twitter is to use it as a promotional tool for its ABC, ESPN, Disney Channel, and Marvel content library. This logic is blasted hope. Twitter is the least effective social site for content promotion.

Statista’s chart below clearly illustrates why Twitter’s management might be desperate enough to sell. Twitter users are not spending enough time on the site/app. How could Disney use Twitter effectively to promote its news and entertainment content when that micro-blogging site’s monthly active users spend only an average of 2.7 minutes every day on Twitter?

Furthermore, Twitter is already fast-losing its luster among Americans. U.S. audience is a coveted market for targeted advertising. As you can see from the chart below, Twitter is fast-losing its appeal as social network for advertising products to Americans.

(Source: Business Insider)

Acquiring Twitter Is Unnecessary & Undesirable Burden

Twitter’s weak user engagement should already warn Disney investors. Buying Twitter will only poison the Mickey Mouse empire with a huge dose of debt. As of July 2016, Disney’s Cash & Equivalents is only $5.23 billion. Twitter is not going to come cheap especially that Disney will have to compete with cash-rich Alphabet (GOOG), Salesforce (CRM), and Microsoft (MSFT),

Disney will likely have to handicap itself with at least $20 billion debt to afford Twitter. Twitter allegedly wants to sell (not merge with another firm) itself for $30 billion. Let’s guesstimate that Disney could negotiate it down to $22 billion. Disney will have to borrow $18 billion to $20 billion to finance it.

Interest rates on a $20 billion debt will sure drag Disney’s bottomline. Twitter’s annual losses will also become Disney’s burden. I honestly do not think Twitter can make itself profitable. Twitter has proven itself in incapable of competing with the advertising platforms of Facebook (FB) and Alphabet. The average 2.7 minutes/day spent by Twitter users makes Twitter unattractive for serious digital advertisers.

My fearless forecast is that Twitter will post annual net losses of at least $400 million for the next five or ten years. Morningstar’s chart below shows how costly it will be for Disney to own Twitter. Not only will Disney have to spend $22 to $30 billion to acquire Twitter, it will also have to subsidize it for $400 million++/year for many years to come.

(Source: Morningstar)

Annual interest payments on $20 billion debt even at 4% rate is $800 million. Buying Twitter therefore will drag Disney’s earnings around $1.2 billion per year. I would rather have Disney spend that said $1.2 billion every year on producing more movies and TV shows. Unlike Twitter’s money-losing business model, Disney-made movies are highly profitable products.

Conclusion

I reiterate my position that I will short Disney if it buys Twitter. Buying Twitter will cost more than the $15.5 billion that Disney spent on Marvel, Pixar, and Lucasfilm. Those three acquisitions are complementary to Disney’s entertainment content-driven business. Ad-dependent Twitter is not.

Disney should just let Alphabet acquire Twitter. Alphabet is an expert in digital advertising. I am sure it is the most qualified to turnaround Twitter’s pathetic advertising platform. My fearless forecast is that Alphabet/Google is the leading candidate because it has enough idle cash to do so.

Microsoft is also unlikely to meet the $30 billion asking price of Twitter. It just spent $26.2 billion acquiring LinkedIn (LNKD). Microsoft needs more time to digest its LinkedIn acquisition. Microsoft is also not an expert in digital advertising. Twitter is not a good fit for Nadella’s cloud-first monetization vision for Microsoft. Microsoft bought LinkedIn (and not Twitter) because it makes most of its revenue from premium subscription fees. Companies and HR headhunters pay LinkedIn to find the best employees.

Disney’s stock has YTD return of -13.76%. However, the most recent algorithmic signals from I Know First are saying that DIS has positive near and long-term market trends. Maybe Disney not buying Twitter will push the stock higher this year.

In a 1- year forecast dated January 14, 2015, I Know First’s algorithm indicated positive growth for DIS. On January 14, 2016, DIS had returned 5.39%, showing the accuracy and precision with which I Know First has recommended Disney to investors in the past.