Twitter Stock: Watch The Circus From The Sidelines

What happened?

Twitter’s (NYSE:TWTR) stock is back in the trouble zone since Elon Musk announced his 9.2% stake in the social media company that triggered a buying frenzy among retail investors on 4/4. Following the rally, I published an article on 4/12 urging investors to get out of the hype given Twitter’s concerning outlook and an investment narrative that was best described by Stifel analyst Mark Kelley as a “full blown Elon circus.”

On 4/14, Musk made an offer to buy out Twitter for $44 billion or $54.2 a share. My initial analysis considered it to be a generous offer but management would likely push back the deal on a “not so premium” valuation. On 4/25, however, Twitter accepted the offer, and Musk subsequently sold $8.5 billion worth of Tesla shares to help fund the purchase in addition to bank borrowings. Both parties would agree to close the transaction by 10/24/2022, with a $1 billion termination fee from either party if the deal is cancelled under certain conditions.

Fast forward to today, Twitter has given up all its gains since Musk’s initial ownership disclosure as the Tesla boss is now reluctant to finalize the acquisition on an alleged lack of transparency in the number of spam/fake accounts on the platform. Per the latest 13-D filing from Musk’s lawyers on 6/6, Twitter has been unable to provide the appropriate user data to allow Musk to vet spam accounts independently.

Mr. Musk has repeatedly requested since May 9, 2022 to facilitate his evaluation of spam and fake accounts on the company’s platform. Twitter’s latest offer to simply provide additional details regarding the company’s own testing methodologies, whether through written materials or verbal explanations, is tantamount to refusing Mr. Musk’s data requests.

What now?

Should the deal fail to materialize, investors may have little to look forward to on the fundamental side of things. On 4/28, Twitter reported mixed 1Q22 results with slightly below consensus revenue of $1.2 billion (+16% YoY). Core advertising revenue of $1.11 billion grew 23% YoY (1% below consensus) as management pointed to ad spend headwinds due to the Russia/Ukraine war. On the expense side, growth outpaced revenue at 35% YoY to reach $1.3 billion, leading to an operating loss of $128 million (-10.6% operating margin). Historically, Twitter isn’t a very profitable company, and the lack of bottom-line earnings is a major risk given the increasingly challenging macro backdrop.

While mDAU reached 229 million (+15% YoY / 5.5% QoQ), the ability to achieve management’s initial goal of more than 315 million daily users by 2023 (now cancelled due to the deal with Musk) seems questionable as user growth is likely to slow down after a strong 19% CAGR between 2019 and 2021, a period when social media benefited handsomely from the pandemic. As the platform adds fewer users, ARPU becomes the next leg of growth. However, this could be challenging given Twitter’s relatively small user base where advertisers may not always find their most appropriate target audiences and pay the highest CPM (cost per thousand impressions).

Bottom line

The key investor takeaway is that buying stocks based on Elon Musk’s tweets (or anyone’s tweets) is never a healthy strategy. Given Twitter’s shaky fundamentals, the only reason to hold on to the stock is a final yes from Musk. Until that day arrives, shares are likely to remain volatile based on headlines and speculation. As a result, I believe it’s always best to watch the circus from the sidelines.