Scott Olson
Elon Musk is known for many things, including his consistency in creating controversies. I’m not sure whether that should be looked upon as a good thing or a bad thing, but what I do know is that both investors and Mr. Musk himself have faced difficulties because of these controversies. From smoking weed on the Joe Rogan Podcast to Tweeting about taking Tesla, Inc. (TSLA) private, Elon Musk has been making headlines for all the wrong reasons in addition to all the right reasons such as turning Tesla profitable.
On April 14, Elon Musk announced a deal to acquire Twitter, Inc. (NYSE:TWTR) for approximately $44 billion, and this announcement came on the back of Mr. Musk acquiring just over 9% of Twitter shares publicly in the weeks that led to this announcement. With the aim of privatizing the company, Twitter’s Board of Directors accepted this offer on April 25. Twitter stock surged from less than $40 to over $50 in April with this development, but this momentum was soon lost when the market realized that the deal could come under pressure not just because of regulatory scrutiny but also because of Mr. Musk’s track record of controversies. Confirming these fears, Elon Musk sent a letter to the Board of Directors of Twitter on July 8 stating his decision to back off on the proposed acquisition.
As a shareholder of Twitter or even as an investor who has been waiting on the sidelines monitoring these developments, it’s understandable to be in a confused state about the future of Twitter. In this article, I will focus on addressing some of the questions raised by investors.
Why Did Elon Musk Cancel The Twitter Deal?
Elon Musk decided to abandon the proposed deal because of an apparent failure by Twitter to provide him with data related to spam accounts on the platform. The letter sent by Mr. Musk’s lawyer discusses this problem in detail. Below are the main reasons that led Elon Musk to abandon the deal.
- Not complying with Elon Musk’s repeated, documented requests to provide information related to Twitter’s process for auditing the inclusion of spam and fake accounts in mDAU.
- Not providing sufficient information related to Twitter’s process for identifying and suspending spam and fake accounts.
- Not providing daily measures of mDAU for the past eight quarters.
- Not providing access to Board materials related to Twitter’s mDAU calculations.
- Not providing materials related to Twitter’s financial condition.
In this letter, Elon Musk’s lawyer goes on to claim that initial findings revealed Twitter’s claim of fewer than 5% of its mDAU are fake/spam accounts to be entirely false and asserts that the real fake/spam account count is “wildly higher” than these reported numbers. Based on these preliminary findings, Mr. Musk’s lawyer claims that Twitter has reported materially misleading information, which is a breach of merger terms.
How Will Elon Musk’s Deal Cancellation Impact Twitter Stock?
Soon after Elon Musk’s decision to pull out of the proposed deal, Twitter, on July 12, filed a lawsuit against Mr. Musk in the Delaware Court of Chancery, and the company promised to hold Elon Musk true to the original deal that was proposed in April. Twitter stock had already come under pressure due to macroeconomic challenges when Mr. Musk’s decision to break up the deal came to light, and since then, TWTR stock has traded sideways.
To understand the impact of this deal cancellation on Twitter stock, we need to first understand the possible outcomes of this decision. Below are the outcomes that I can think of.
Scenario 1: Elon Musk could be ordered to pay the stipulated breakup fee of $1 billion to Twitter and the deal will be canceled.
Scenario 2: Elon Musk and Twitter could reach some middle ground that involves a settlement of a different amount than the agreed-upon breakup fee.
Scenario 3: The two parties might agree to go ahead with the deal at a different price instead of the proposed $54.20 per share price tag in April.
Scenario 4: The judge could order Elon Musk to stick to the original deal terms and acquire Twitter for $44 billion.
Scenario 5: Elon Musk could walk away from the deal without any repercussions.
Scenario 6: Elon Musk changes his mind yet again and decides to buy Twitter at the original price without going into a legal battle with the company.
Twitter stock will feel the impact of any of these outcomes, and as things stand today, it seems like shareholders/potential investors have a tough decision to make today. The below table summarizes my expectations for Twitter stock under each of these scenarios.
| Scenario | The expected impact on Twitter stock |
| Scenario 1 | Twitter stock is likely to crash as investors are banking on a privatization deal – not just $1 billion in the form of a fee. |
| Scenario 2 | Twitter stock is likely to crash as investors are banking on a privatization deal – not just $1 billion in the form of a fee or any other amount for that matter. |
| Scenario 3 | The deal price will still be meaningfully above the current market price and therefore, Twitter stock is likely to gain. |
| Scenario 4 | This is a win for Twitter shareholders and the stock will surge. |
| Scenario 5 | Twitter stock is likely to crash, and the expected impact is likely to be more severe than Scenarios 1 and 2. |
| Scenario 6 | This is the best-case scenario for Twitter shareholders as such a U-turn will boost the confidence of investors rather than if Elon Musk is forced to go ahead with the transaction. Twitter stock will surge. |
One thing is for sure – there’s a lot of uncertainty surrounding Twitter stock today. Because of the possibility of multiple outcomes, it seems too risky to play with TWTR stock today in the hopes of enjoying short-term gains.
Is TWTR Stock A Buy, Sell, Or Hold?
Even on the back of 16.6% YoY growth in monetizable daily active users in Q2, Twitter missed both revenue and earnings estimates for the second quarter because of macroeconomic challenges facing the global economy, especially the advertising sector. These challenges should persist in the foreseeable future with the global economy showing some cracks. The uncertainty surrounding Elon Musk’s deal does not make things any better for Twitter amid macroeconomic uncertainty. The trial is only set to begin in October, and this leaves the company ample time to focus more on operating efficiencies that could help the company have a better say in the court. This is a good thing for shareholders, but then again, a lot will depend on the outcome of this trial as a change in management could materially alter Twitter’s prospects.
There is a lack of clarity regarding the long-term outlook for Twitter as well. The social media sector is undergoing radical changes with the growing popularity of short-form video content. Twitter, however, is not ideally positioned to benefit from this trend. Facebook, Instagram, and even Snapchat seem to be well-positioned to make the most of this growing popularity of short-form video content, which has already prompted advertisers to focus on these platforms. If the global economy continues to face challenges, it would be reasonable to expect advertisers to cut down on some of their spending, and I believe Twitter could be among the first few social media platforms to feel the burden of such a decision.
Twitter has always been at a disadvantage when it comes to attracting advertisers because of the rapid pace at which users scroll through the content. This has always been a concern for me, and this is something that could come to the spotlight yet again in the coming quarters. We are yet to see any material progress from the subscription business either.
Taking all this into consideration, I believe investing in Twitter stock today carries more risk than reward. Shareholders of the company, however, might want to remain invested to play out the legal battle with Elon Musk.
Takeaway
Twitter is setting itself up for what could be a lengthy legal battle with Elon Musk. There is a lot of uncertainty about the outcome of this legal battle, and to make matters worse, there is uncertainty about Twitter’s long-term prospects too. I rate TWTR a sell as things could get far worse for the company before we see any positive developments, and even then, I believe the company will continue to struggle to grow its earnings.
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