TWTR With Nobias Technology: Case Study on Twitter
With the world’s richest man, Elon Musk, making a significant investment in Twitter (TWTR) shares and then offering to take the company private with a buyout offer, TWTR shares have been on a volatile ride in recent weeks. Prior to Musk’s offer, Twitter was trading for less than $40/share. Then, they rallied up to approximately $53, before trending lower to their current share price of $48.93.
Leo Sun covered the recent Must/Twitter saga in a recent article published at The Motley Fool. Sun said, “Twitter's stock recently went on a roller-coaster ride after Elon Musk -- who previously took a 9.2% stake in the social media company -- offered to buy all of its remaining shares for $54.20 apiece in a $43 billion deal. It's unclear if Musk is actually serious about buying Twitter, but its stock had delivered unimpressive growth for years before his abrupt bid.”
But, even with TWTR’s recent rally, Sun points out that the stock’s long-term performance has been underwhelming. He wrote, “Twitter went public on Nov. 7, 2013, at $26 per share and opened with a 74% gain at $45.10. But as of this writing, it still only trades in the high $40s.” Sun continued, “Investors who bought some IPO shares could have turned a $1,000 investment into about $1,800 today, but the same amount invested in an S&P 500 index fund during the same period would be worth roughly $2,500 now.”
TWTR April 2022
Sun then highlighted Twitter’s historical monthly active users (MAU) growth trends, ultimately, pointing out that this social media company is much smaller than its peers. He put a spotlight on Twitter’s early success with regard to MAU growth, pointing to the strong double digit that the company generated shortly after its IPO. He said, in 2013, Twitter’s MAU growth was 30. In 2014, that figure was 20%. And, in 2015, Twitter posted year-over-year MAU growth of 11%.
With growth slowing, Sun mentioned that “Founder and early CEO Jack Dorsey returned to succeed Costolo, but Twitter still struggled to gain new users. Its MAUs dipped to 319 million in 2016, rose to 330 million in 2017, but fell to 321 million in 2018.”
Sun continued, saying, “In 2019, Twitter stopped disclosing its MAUs altogether and rolled out a new metric: monetizable daily active users (mDAUs). It claimed that mDAUs filtered out the spam, bot, and inactive accounts which made it difficult for advertisers and investors to gauge its true engagement rates.” “But,” he contiued, “that change also revealed just how tiny Twitter was. Twitter ended 2019 with 152 million mDAUs. That figure rose 27% to 192 million in 2020 and grew another 13% to 217 million in 2021, but it's still a lot smaller than Snapchat, which ended last year with 319 million DAUs.”
Sun note that in early 2021, Twitter provided medium-term guidance, calling for 315 million mDAU by the end of 2023. He said, “It also declared it could more than double its annual revenue from $3.7 billion in 2020 to over $7.5 billion in 2023.”
This was great news for bulls; however, Dorsey recently left his position as Twitter CEO to focus on running Block (SQ), another company that he founded, which, as Sun says, “cast doubts” on the company’s ability to hit these 2023 targets.
Regarding Musk’s recent investing in TWTR, Sun said, “Musk, a vocal critic of Twitter's censorship policies, was initially appointed to its board of directors upon disclosing his initial stake in early April. But he subsequently turned down the offer, publicly mocked the company in a series of now-deleted tweets, and launched a full buyout offer.”
However, Sun says that he doesn’t expect Twitter’s board to accept Musk’s “best and final”offer and he concluded, “Therefore, I predict that Musk will eventually walk away, sell his stake, and Twitter will go right back to where it was before the buyout drama started.”
In other words, Sun believes Twitter’s share price is likely headed back to the $40 area and therefore, investors buying the stock today are putting themselves at risk of significant losses (Twitter currently trades for approximately $48/share).
It appears that Sun isn’t the only credible author that the Nobias algorithm tracks who has this opinion. The Asian Investor also recently published an article at Seeking Alpha offering a bearish opinion on TWTR shares after their recent rally.
They author wrote, “In response to recent developments surrounding Elon Musk and social media company Twitter (NYSE:TWTR), I am changing my recommendation from Twitter from buy to sell. Considering that a full hostile takeover of Twitter is unlikely, I believe it is best for shareholders to sell into the current strength!”
Regarding the likelihood that Twitter will accept Musk’s $54.20/share offer to buy 100% of Twitter, The Asian Investor said, “Board members have a fiduciary duty to evaluate take-over offers and make a determination about whether or not an offer is in the best financial interests of shareholders. I don't believe, at this point, that Twitter will accept Elon Musk's takeover offer and the company might look for another potential acquirer.”
The Asian Investor also believes that it’s possible that Twitter shares will fall back down to the ~$40 area in the near-term, meaning that they offer double digit downside potential in the near-term. They wrote: “In my last work on Twitter, I recommended to buy the social media company due to a strengthening ad business, strong user growth and improving free cash flow in FY 2022. I still believe these reasons are valid reasons to consider Twitter... if there wasn't a takeover offer on the table.
The surge in Twitter's stock price from $39, before the disclosure of Elon Musk's 9.2% stake, to $54 this week gives investors the opportunity to capture a huge takeover premium. If the takeover bid for Twitter gets rejected by the firm's board and Elon Musk officially abandons his hostile takeover of the company, the share price of Twitter is likely to sink back to where it was in March.”
However, we have seen bullish articles posted by credible authors recently as well. Julian Lin published a report on Seeking Alpha recently which highlighted his opinion that TWTR shares offer strong upside potential.
Lin stated, “From a valuation perspective, TWTR trades at only 6x sales. It trades at 55x earnings which does not look cheap, but this is the kind of company where operating leverage can cause the bottom line to grow at a rapid pace once the company decides to slow down investments in growth.” He continued, “Prior to Musk’s involvement, this stock has been a “show me” story, unable to achieve rich multiples in spite of what feels like an inevitable inflection point in monetization. Yet after Musk’s large buy-in, I could see the stock trading up to a 2x price to earnings growth ratio (‘PEG ratio’). TWTR has always seemed to trade based on the promise of future innovation - the presence of Musk makes such a possibility seem ever more likely, and that should be reflected in the valuation.”
Ultimately, Lin said, “Based on the 20% projected revenue growth rate, TWTR might trade at 12x sales, representing 100% upside over the next 12 months.” Regarding near-term risks, Lin says, “There still remains the risk that Musk eventually liquidates his position without any real impact, but the company has a solid balance sheet and is generating cash.” Finally, he states, “I nonetheless am optimistic that Musk can inspire some innovative changes in the company and the stock offers substantial upside in either case.”
Looking at the aggregate opinions of the credible authors and Wall Street analysts that the Nobias algorithm tracks, it’s clear that Twitter remains a battleground stock after the Musk news. Right now, 55% of recent reports published on the stock by credible authors have included a “Bearish” bias. And, looking at the $44.20 average price target being applied to TWTR shares by credible Wall Street analysts, we see that TWTR offers downside potential of approximately 9.6%.
We have seen analysts come out with price targets in the $50 area in recent weeks as the Musk news sinks in, but at this point in time, there is no clear consensus on the direction that credible authors/analysts expect the stock to trend.
UPDATE:
On 4/25/2022 news broke that - contrary to the opinions of the credible authors we originally cited - Twitter’s Board of Directors agreed to be acquired.
A press release published by the PRNewswire stated, “Twitter, Inc. (NYSE: TWTR) today announced that it has entered into a definitive agreement to be acquired by an entity wholly owned by Elon Musk, for $54.20 per share in cash in a transaction valued at approximately $44 billion. Upon completion of the transaction, Twitter will become a privately held company.”
The press release continued, “Under the terms of the agreement, Twitter stockholders will receive $54.20 in cash for each share of Twitter common stock that they own upon closing of the proposed transaction. The purchase price represents a 38% premium to Twitter's closing stock price on April 1, 2022, which was the last trading day before Mr. Musk disclosed his approximately 9% stake in Twitter.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Elon Musk was quoted saying: "Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated. I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans. Twitter has tremendous potential – I look forward to working with the company and the community of users to unlock it."
Although TWTR’s Board unanimously approved the takeover, the deal is also subject to shareholder approval. However, the press release stated that the deal is expected to close in 2022 now that Musk has funding lined up.
To finance this $44 billion deal, the release stated, “Mr. Musk has secured $25.5 billion of fully committed debt and margin loan financing and is providing an approximately $21.0 billion equity commitment. There are no financing conditions to the closing of the transaction.”
News that Musk used his personal Tesla (TSLA) stake as a part of a margin loan to secure funding caused Telsa shares to fall by 12.18% on 4/26/2022. Twitter closed the trading day on 4/26/2022 at $49.68. The proposed buyout price of $54.20 represents upside of approximately 9.1%.
As of 4/27/2022, the average price target being applied to TSLA shares by the credible Wall Street analysts that the Nobias algorithm tracks is $1010.00. After yesterday’s 12% sell-off, TSLA shares closed the trading day at $876.42. Relative to this closing price, the average price target discussed above represented upside potential of approximately 15.2%.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long SQ. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.