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Meet the New Boss at Twitter: Elon Musk
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Meet the New Boss at Twitter: Elon Musk

As a social media platform, Twitter (TWTR) has been a leader in the field for some time. It’s also had its share of controversy in the meantime, especially over who’s “allowed” to say what therein.

A recent stock purchase sent the company spiraling upward, though it may also unlock a whole new set of controversies in the days ahead. Right now, I’m bearish on Twitter, not because of its ownership, but rather because of its prospects.

The last year for Twitter hasn’t been all that great. A hefty drop in April 2021 cost the company about a third of its value. The company snapped back quickly, and then started a much more gradual pattern of losses that extended all the way to about March 2022.

The latest news may turn this around for good. Disclosures revealed that Elon Musk had purchased a 9.2% stake in Twitter. Described as “passive” in nature, the buy was worth roughly $3 billion based on Twitter’s share price on Friday.

Wall Street’s Take

Turning to Wall Street, Twitter has a Hold consensus rating. That’s based on eight Buys, 18 Holds, and two Sells assigned in the past three months. The average Twitter price target of $45.35 implies 9.2% downside potential.

Analyst price targets range from a low of $30 per share to a high of $60 per share.

Hedge Funds Abandoning Ship

The TipRanks 13-F Tracker shows that, between September 2021 and December 2021, hedge funds cut their investment in Twitter by roughly half. The total number of shares owned went from around 38.19 million shares to 20.86 million shares in that quarter.

Interestingly, this comes after a year of climbing investment. Hedge fund participation in Twitter increased from December 2020 all the way to September 2021.

Meanwhile, Twitter’s dividend history is even more sparse than the hedge fund scene. Twitter has yet to offer a dividend to investors.

Elon Musk: The Perpetual Wildcard

The problem with trying to figure out where Twitter is going in the short term is that Musk’s new involvement is wildly out of the ordinary for Twitter. It’s the investment equivalent of dumping raw sodium into water.

Multiple analysts are already projecting potentially huge new moves for Twitter to come. He could “do almost anything,” say some, so “use your imagination.” That’s part of the problem. With nearly 10% of the company under his direct control, he represents a voting bloc that could destabilize the entire company. He could do just about anything.

Just because Musk’s involvement is “passive” right now doesn’t mean that has to remain the case for any length of time. It can turn active at a moment’s notice.

Given that Musk has already been spotted bemoaning Twitter’s dubious connection to free speech — a poll on the question resulted in a majority believing Twitter wasn’t rigorously adhering to same — Musk’s “do anything” might well start there.

Worse, Musk posted via tweet on March 24 that he was “…worried about de facto bias in ‘the Twitter algorithm’ having a major effect on public discourse.” He subsequently invited followers to vote on whether or not the algorithm in question should be open source.

However, having Musk involved might give Twitter a leg up. One of Twitter’s biggest problems has been its ability to monetize. While Facebook (FB), now Meta Platforms, has been able to branch out into shopping and videos and even virtual reality, Twitter’s ability to keep up has been much less. Twitter’s text-heavy nature, with short blurbs for commentary, has left it few angles for expansion.

With Musk involved, perhaps the company can find a better way to keep regular income coming. Improved cash flow would certainly help Twitter. It might give it a way to produce a dividend, a point investors would no doubt approve of.

Right now, it’s on the back foot compared to its vast array of social media competitors. Worse, its ability to recover dwindles with each new development from those competitors.

It’s not immediately clear how taking Twitter’s algorithm open-source would do that job. However, a Twitter with a much more clearly defined stance on free speech might not hurt. It might even help bring back some lost clientele that could be part of future monetization efforts.

Concluding Views

Twitter wasn’t in the best of shape before Musk purchased his stake. With Musk involved, however, that could improve in pretty rapid fashion. With the company trading above its average price target, and presenting downside risk to investors, it’s not exactly a great time to get in on Twitter.

However, it will also bear watching in the near-term. If Musk goes active instead of passive, that could be a clear sign to get in. Musk involved in Twitter is perhaps one of the most destabilizing elements that Twitter could ever see.

Based on the last several months, Twitter could use some destabilization.

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