Twitter (TWTR) is in a state of flux. The richest man in the world, Elon Musk, purchased a 9.2% interest in the company and is now seeking a hostile takeover.
Twitter jumped in value by 25% following the initial purchase and, has since fallen slightly. Twitter’s underlying fundamentals have been solid despite the Q1 tech slump putting downward pressure on the price of the stock.
FY 2021 would have had positive earnings if the unusual expense of litigation settlement in Q3 did not occur. Musk’s arrival has brought renewed interest as well as risk into the previously undervalued company. I am neutral on TWTR.
Musk’s Escapades
Love him or hate him, Musk draws attention. We have seen the Musk price spike previously in Bitcoin and Dogecoin, where any positive sentiment pumps the market in the short term and negative sentiment crashes the price in the short term.
Expect the price to stay between the initial pre-Musk price of $39 and a post-Musk high of $52~ until more material news is announced.
Musk is a vocal advocate against Twitter moderating content, a notable example being the removal of former President Donald Trump. He has over the years had less than tasteful tweets, causing him to face widespread criticism and a SEC fine.
It is likely Musk’s purchase is to push his free speech stance. Due to his cult of personality, Musk is still likely to have significant influence on the company regardless of being a board member or not.
Musk’s relationship with management quickly broke down passing over the board member offer, which would cap his ownership share at 14.9%. Musk is now seeking control, making a hostile take-over offer of $54.20 per share or $41.4-billion market cap with the goal of making Twitter a private company.
The existing Twitter board is also mulling over a poison pill to prevent Musk’s hostile takeover. With this in mind if it is implemented Musk would need to raise even more capital to execute his take-over. Ultimately, hostile take-overs are not cheap or easy and a poison pill makes a difficult plan even harder.
After the SEC filing by Musk the market opened higher in the $48 range but fell over trading to $45. If the market believed Musk’s takeover would be successful the shares would be trading at or close to his proposed price of $54.20. Simply, Musk’s offer isn’t appealing and is likely to be withdrawn or altered.
Ad Effects
Many people on the surface will be anti-moderation until they see the negative impact. However, the reality is most people don’t want zero-moderation content. Websites like 4chan already exist and have existed since well before Twitter.
Websites like 8chan, Voat, and Truth Social were created to have nearly no moderation, but all failed to gain significant traction and only exist to serve hinge groups. If Twitter were to go down the road of less or no moderation it will not be a positive for the platform.
No moderation makes a platform unfriendly to companies looking to advertise; just compare the advertisement on 4chan to Twitter. Even Youtube faces this issue, any remotely questionable content causes ads to be disabled. Questionable content can not exist on a website that relies on advertisement.
An idea floated by Musk amongst many others is to increase the prevalence of Twitter Blue to reduce the dependence on ads. Twitter Blue is a subscription based program. This is a hard sell, as social media requires high user counts, and many people don’t want to pay. The current form of Twitter Blue hasn’t been materially impactful to financials.
If Musk were to get his way of absolute free speech he would not be able to act in a fiduciary capacity as a board member, hence the reversal and now attempted takeover. Despite the initial increase in the stock price, Musk creates substantially more risk than reward as a significant stakeholder. Twitter would be better off if Musk does not push absolute free speech.
Despite expectations of Musk’s acquisition failing he will still hold significant sway over the company with his current holdings.
Fiscal Outlook
Twitter is going to face headwinds as the FED tightens its monetary policy. Advertising is one of the first things cut during a broad economic downturn. Twitter’s top line will suffer if advertisement is broadly cut.
Eighty-one percent of U.S. adults believe a recession will occur within the next year, while Goldman Sachs puts it between 20%-35% for the next year. The general populous’ expectation of recession can increase the odds of a recession on its own, as households reduce spending.
Although macro-headwinds are expected, TWTR has been seeing great growth. Revenue grew 36.6% year-over-year, and daily active users (DAU) grew by 13% year-over-year to 217 million for Q4. Management still expects to hit 315 million DAU by the end of 2023, representing a growth of 20% per year.
Revenue from ads is currently $4.5 billion for 2021. If revenue per user is held constant revenue will be $6.53 billion for 2023. Management expects $7.5 billion in revenue from ads by the end of 2023, implying growth of revenue per user of ~15% over the next two years.
However, Musk’s influence could alter the outlook. Twitter has previously banned advertisements on state-owned media, citing long-term values. With Musk influencing the company, these long-term values are likely in a state of flux.
Musk also has questioned the validity of the volume of Twitter users, citing crypto scams and bots. Deletion of bots will lower the volume of users, but overall revenue would likely be the same. Additionally, if the hammer comes down on bot accounts the average quality of users will go up, potentially increasing advertiser interest.
TWTR is still trading at a premium compared to competitor Meta (FB). TWTR has a 7.3 price-to-sales versus Meta’s 5.4. Both values imply high growth, but TWTR is even higher in comparison. If Q1 2022 expectations are not met, TWTR could easily fall back to the pre-Musk price range.
On Wall Street
Turning to Wall Street, Twitter is a Hold with five Buy, 19 Hold and three Sell Ratings over the past three months.
The average TWTR stock price target is $45.57, representing 1.1% upside potential.
The Q1 2022 earnings call on April 28 could give insight into managements response to Musk’s plan, if the information is not given beforehand. Until then, Musk’s very material plan is too up in the air, which is why I’m neutral.
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