Why Twitter Shareholders Should Sell Out to Elon Musk
Elon Musk’s embrace of Twitter leaves investors with a riddle wrapped in a mystery.
Much as he has whipsawed the prices of Bitcoin and Dogecoin with his tweets in the past, Musk generated a frenzy of headlines over Twitter (ticker: TWTR) in recent weeks: first, taking a big stake, then joining the board, not joining the board, and finally offering $54.20 a share to take the company private.
Even for a company that has frustrated repeated efforts to wring big profits from its monopoly on real-time news, the takeover bid falls well short of offering a neat solution to Twitter’s woes. Indeed, the stock closed Thursday at $45.08, in apparent disbelief that Twitter will get bought by Musk or anyone else.
That is still 15% above where it traded before Musk disclosed his 9.1% position. On Friday, the company announced it had adopted a “poison pill” to thwart a hostile takeover.
So what should Twitter shareholders do? Sell to Musk or anyone else who will take their money, suggests Michael Nathanson of SVB’s MoffettNathanson and other analysts. Under its present management and business model, Twitter stock is unlikely to revisit last year’s $80 peak.
The upside for the stock is now capped, says an analyst whose hedge fund sold its position at last year’s higher prices. “The situation’s turned 180 degrees in just a week,” he says. “It was amazing when Elon seemed like he would turn the stock into a meme. Then it all fell apart.”
Musk, the chief executive of Tesla (TSLA) and SpaceX, told a TED talk audience this past week that he was not after Twitter for the money, but rather for his love of free speech. Many tweeters on the platform say he would turn Twitter into an unmoderated nightmare, like the town square in a Purge movie or right-wing sites like Parler.com. Those fears aren’t warranted.
Musk calls himself a free speech “absolutist,” but he isn’t. He told the TED audience that a platform’s content needs some moderation to filter calls to violence and conform with local law. Rule breakers deserve timeouts, he said. Musk’s suggestion that Twitter speech controls should be “open source” echoes the aims of the platform’s co-founder and recent chief executive, Jack Dorsey.
Turning Twitter into a haven for hate speech would destroy its business value, notes Eric Goldman, a law professor at Santa Clara University who studies the regulation of social media.
Musk may say he’s primarily interested in Twitter’s civic value, but he does know something about creating valuable businesses. He has suggested that the company try to get more revenue from subscriptions.
Twitter hasn’t gotten far in its pursuit of the direct-response advertising sales enjoyed by Facebook parent Meta Platforms (FB) or Google parent Alphabet (GOOGL). Despite Twitter’s goal of getting half its ad revenue from direct-response clicks, Nathanson notes that brand advertising still brought in 85% of revenue last year. Privacy restrictions by Apple (AAPL) have steepened the grade for anyone trying to climb into performance-advertising.
As a result, Nathanson thinks it’s generous to assume that Twitter can reach 2025 cash earnings of 25% on $10.7 billion in revenue (or double last year’s sales of $5 billion). But he does. Applying a multiple of 13 to that estimate of $2.7 billion in 2025 earnings before interest, taxes, depreciation, and amortization (Ebitda)—which is between the multiples of Meta and Alphabet—the analyst says Twitter would have an enterprise value just shy of $35 billion, in a couple of years’ time. And that’s before discounting to the present. Today, Twitter already trades at that level.
In his letter to the board, Musk called his $54.20 bid a “best and final offer.” In the past, others have looked into acquiring Twitter, including Walt Disney (DIS) and Salesforce (CRM). If Twitter’s board doesn’t see Musk as its white knight, it’s not likely they would find one willing to bid far more than his cannabis-joke price.
Unless you’re like Musk and want to own Twitter for idealistic reasons, you should let him have it. He won’t ruin it, so you can do so with a clear conscience.