The Elon Musk-Twitter (TWTR) saga keeps looping back to the bot issue, and there is no end in sight. According to the Washington Post, the takeover deal is in “serious jeopardy” due to the fake/spam account verification.
The whole fiasco has lowered Musk’s intent to buy Twitter. If sources are to be believed, Musk has cooled off talks to secure debt financing for the $44 billion deal.
This could be followed by an ugly brawl between the two parties. On the one hand, Musk has signed off on a $1 billion breakup fee, and on the other, he can walk off from the deal citing authenticity issues. Musk may even negotiate a lower price to go through with the deal.
On Thursday, TWTR stock slipped over 4% during the extended trading session on the news.
All About Bots
After raising grave concerns about the authenticity of the bot numbers on the social media platform, the Twitter team handed over the required historical tweet data to Musk and his team to verify them.
However, sources claim that Musk and the team have not been able to substantiate the real bots on the platform. It must have been overwhelming to figure out the best possible way to gauge real and fake accounts on Twitter.
As per a WSJ report, Twitter management stated that it would be a difficult task for outsiders to judge the actual number of bot size because it involves using private user information including internet addresses, contact information, and geolocation data, which Twitter cannot share due to confidentiality issues.
Nonetheless, Twitter continues to claim that the number of bots on its platform is lower than 5% of monetizable Daily Active Users (mDAUs). Twitter claims to scan out over one million bot accounts daily from its site and also locks millions of suspected accounts a week if their authenticity cannot be verified.
Analysts Weigh In on the Deal
Yesterday, Wedbush analyst Daniel Ives slashed the price target on TWTR stock to $43 (10.8% upside potential) from $54 owing to the looming uncertainty of Musk buying Twitter at the agreed-upon price. Ives maintains a Hold rating on the stock and noted that both investors and the Street are “clearly highly skeptical of a deal happening at the current bid.”
According to Ives, there are three possibilities for the saga. 1) deal closes without issues at $54.20 (less than 5% chance in our opinion); 2) deal happens but at a renegotiated price in the $42-$45 range (60% chance); or 3) Musk looks to exit stage left and tries to pay $1 billion breakup fee, and the Twitter Board fights Musk in an elongated court battle (35% chance).
Similarly, Evercore ISI analyst Mark Mahaney cut the price target on TWTR to reflect the deal price of $54.20 (39.7% upside potential) from $60 while maintaining a Hold rating.
“We view it likely that the Musk-TWTR deal will close on terms reasonably close to Musk’s formal offer,” Mahaney noted.
The analyst has also reduced the revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates for FY22 and FY23 of brand advertising companies, including Twitter, owing to the “softening macro environment (Inflationary Pressures, Supply Chain Challenges, and Economic Downturns).”
With 23 unanimous Holds, TWTR stock has a Hold consensus rating. The average Twitter price forecast of $50.73 implies 30.8% upside potential to current levels. Meanwhile, the stock has lost 9.1% so far this year.
Parting Thoughts
Whichever way the deal swings, it is surely affecting Twitter’s stock price for the worse. Add to that the current weakening in advertising spending and reduced discretionary income, which are posing an even greater threat to the stock’s trajectory.
