Twitter: Musk To The Rescue
Summary
- Elon Musk acquires more than 9% of Twitter.
- The company has long struggled with growing ad revenues inline with Facebook in part due to executives not actually using Twitter.
- The stock is cheap at 5x forward EV/S targets with the potential for the business to accelerate growth to match the influence of the social platform.
- The potential exists for Musk to buy the stock at a higher price, but that isn't the base case here.
- This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »
Maja Hitij/Getty Images News
The biggest news of the day was Elon Musk acquiring 9.2% of the struggling social media site. The news that Musk apparently wants to take a crack at improving Twitter (TWTR) is an encouraging move considering the fears of him starting a competing platform in the lines of Truth Social (DWAC) being built by Trump. My investment thesis remains very Bullish on the stock despite the initial 25% pop on the move by the CEO of Tesla (TSLA).
Executive Usage Issue
Just a week ago, Musk ran a Twitter poll with 2 million votes questioning whether the platform adhered to free speech principles. Over 70% of the votes gave the social media site a thumbs down.
Now, Twitter is a public enterprise, so the company definitely doesn't have any such requirements. Shareholders though definitely want a platform appealing to all users, whether Republican or Democratic.
Musk now appears to control a larger position of the company than founder and former CEO Jack Dorsey. New CEO Parag Agrawal finds himself in an odd situation of where Elon Musk is a more important shareholder now than Jack in multiple ways.
Musk actually has far more users on Twitter than Jack Dorsey. Despite the latter being a similar influential person to the world having founded both Twitter and Block (SQ) along with work on bitcoin, Musk is far more active and influential on the platform as a top 10 personality with over 80 million followers.
According to Social Blade, @jack is the 887th most followed Twitter account, but the username has the engagement rank down at 23,936th. Jack Dorsey hardly ranks in the top 1 million for actual tweets.
Source: Social Blade
The company has a long history of hiring executives without much experience on the platform. Even the recently-elected Chairman and now co-CEO of Salesforce (CRM) only has 106K followers. He isn't what one would consider a power user of the social media platform despite being a very influential businessman now.
Parag has no job security and surely won't keep his job if Elon Musk were to sell these shares and create a competing platform. Ironically, the new CEO hasn't tweeted since March 16 while the previous tweet goes all the way back to March 3. As with Jack previously, the executives don't appear to even support the social media site via regular usage.
Lack Of Revenues
The stock is up 25% now on the news probably with traders hoping Musk in combination with a venture fund will make a bid for the whole company. Twitter is only back to $50 now while the stock traded above $70 last summer. The stock only trades at 5x EV/S multiple, but the multiple is inline with Meta Platforms (FB) and Pinterest (PINS) now.
Ychart
The real story isn't the multiple of the stock. The issue is the limited revenue base for Twitter in comparison to Meta Platforms (FB). Twitter has done a horrible job of growing the revenue base despite having a social media network as influential to the world as Facebook. Over the lat decade, the former Facebook has grown the trailing revenues to over 23x the size of Twitter.
Ychart
One might even wonder the connection between the lack of usage on Twitter by executives and the minimal revenue growth over the years. After all, the executives appear less interested in using the platform as much as keeping former President Trump (a prior top user) to quit using Twitter.
Consensus analyst estimates have Twitter revenues growing around a 20% clip the next two years to reach $7.3 billion in 2023. The company has already forecasted revenues reaching $7.5 billion.
The analyst community appears to have major doubts on the social media platform to grow at rates hardly faster than the much larger Meta Platforms targeted to grow at rates of 12% and 17%, respectively. Noteworthy, Meta is forecasted to add revenue this year multiples the total size of Twitter leaving little excuses for the social platform not far outpacing the revenue growth of the far bigger Meta.
Takeaway
The key investor takeaway is that Elon Musk brings an interesting party to the table with his power and influence on the social platform far exceeding those of co-founders and current executives. The company has far underperformed the sector leader over the years and subtle improvements in the site could drive the faster growth warranting a far higher stock price.
Twitter is cheap at the current valuation with the sector beaten down, but the real opportunity is the business model to catch up with the global influence of the platform and the importance of the site to influential people like Elon Musk.
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This article was written by
Stone Fox Capital (aka Mark Holder) is a CPA with degrees in Accounting and Finance. He is also Series 65 licensed and has 30 years of investing experience, including 10 years as a portfolio manager.
Mark leads the investing group Out Fox The Street where he shares stock picks and deep research to help readers uncover potential multibaggers while managing portfolio risk via diversification. Features include various model portfolios, stock picks with identifiable catalysts, daily updates, real-time alerts, and access to community chat and direct chat with Mark for questions. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of TWTR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (51)
Think you got Musk and Dorsey confused. Musk has nothing to do with Square and Dorsey isn't focused on Twitter anymore. $TSLA shareholders may be better served by Musk focusing on raw materials for Tesla, but it sure doesn't benefit Twitter shareholders. $TWTR shareholders want him involved, so this opinion isn't going to get much play here.
10.3% so apparently they like Musk on board. Could provide a huge voting block here.
that would be illegal... 😬
You aren't going to like the pre-market move to $53 on Musk being appointed to the board.
The next move is Musk buying up to 14.9% of the company awaiting the management team to execute. Hopefully they will. If not, he'll probably make his next move to buy the company or shakeup management. This is why a new day exists. -According to the filing, Musk will be a Class II director and his term will expire at the company's 2024 annual shareholder meeting.-The filing also added that as long as Musk is on the board of directors, his ownership stake will be capped at 14.9%.
Dorsey created the company. He definitely used it for his social justice efforts and not to reward shareholders.
Think it was a smart move to focus on adjusting the $TWTR business versus trying to build a competing platform. The solutions at Twitter are simple and Jack left the company completely open by not maintaining a larger stake. Now, the new CEO has to produce or shareholders can force him out.
-Also creating tiers of membership is one way to reduce trolling/bots/hate speech and to monetize the product better.
-Get completely out of content filtering and give the power to do that to the end user (better filtering capabilities either by words, topics, verified locations, custom groups etc..)Once they do a few of these things and quit targeting conservative viewpoints they will be on a path for higher multiples like the other social media companies. As of now they are simply begging to be disrupted but the base product is so good its given them a lot of time to fix it. Eventually that will go away, it always does.
It's absurd how little some of the executives use the platform. The CEO and Chairman should be fired for the lack of interaction with Musk the last couple of weeks.
At least they placed him on the board. Though, the lack of interaction until today just proves they don't understand the platform.
Why? When has shorting Musk worked?
No reason for $100 so quickly, but a good CEO would already have the stock at $100.
It has some good potential growth imo. Just need to increase arpu.
OMG finally 'edit' option is here. It just shows how useless jack dorsey was.