Twitter Needs SoundCloud More Than the Reverse

NEW YORK (TheStreet) -- A report made the rounds Monday that Twitter (TWTR) was looking closely at buying SoundCloud.

No price was mentioned. SoundCloud's last financing round pegged its valuation at $700 million, so any deal would presumably be well north of that.

The deal makes perfect sense for Twitter but no real sense for SoundCloud. Here's why.

Twitter shares are still way overvalued at $32 even though that's well below their all-time high of $74 from last December. Twitter's problem is that its users are still a relatively small group for which Twitter does not have that much rich demographic data.

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Twitter has about 255 monthly active users. Weibo (WB) has about 180 million. Twitter's market cap is about $19 billion. Weibo's is about $6 billion. Of course, maybe there's a little extra value to Twitter's U.S. users because advertisers will spend more to reach them. But three times as much? Either Twitter's overvalued, Weibo's undervalued or the truth lies in the middle.

So what does this mean?

It means Twitter needs to diversify.

It should have bought Instagram, but it waited too long and didn't go public soon enough to be able to use its stock for acquisitions.

It did buy MoPub recently to try to show that even though it serves only 250 million mobile users, it can reach a lot more than that through the mobile ad network Twitter sells to. We will see how that plays out over time.

SoundCloud is the leading place to upload and consume audio. It's an incredibly popular place for music and also, increasingly, podcasts. Many have called it the YouTube of audio, and it's in a growth groove.

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