With the Twitter deal expected to go through in the coming weeks, what does this mean for the company and to investors?
If you’ve no idea what the world’s richest man wants to do with a largely unprofitable social network apart from growing his massive 92+m following, you’re hardly alone. Elon Musk has made the headlines recently after it emerged that Twitter has accepted his US$44 billion bid to acquire the social network company.
Following the news, you might be curious to know what it means for Twitter going forward, or why Tesla’s stock is falling.
What happened to Tesla?
On 26 April, a day after Twitter accepted Musk’s bid, Tesla’s shares fell by nearly 12%, wiping out US$130 million worth of Tesla’s market capitalisation and US$29 billion of Musk’s own fortune. In contrast, Twitter’s stock went up by nearly 6% after the announcement of the deal.
It’s believed that investors were concerned Musk would sell his Tesla shares as collateral for loans (a fact that has since come to fruition as he had pledged his Tesla stocks to secure a US$25.5 billion loan from banks). Prior to pursuing Twitter, Musk had pledged US$88.3 million worth of his Tesla shares for other loans.
On top of that, investors are also worried about the possible distractions that could come from owning Twitter, considering that Musk is already the CEO of Tesla, SpaceX, the Boring Company, and Neuralink. He is also expected to be in charge of Twitter in the interim should the Twitter deal materialise.
What’s more, despite reporting excellent Q1 FY 2022 earnings, Tesla is facing increased competition in the electric vehicle market, rising production costs as well as supply issues. The electric car company recently lost a month’s build volume after its Shanghai plant closed down due to COVID-19 outbreaks.
Tesla’s stock has also fallen by 31% since he first purchased a stake in Twitter on 4 April and has been on a deep decline since. However, despite the bear sentiment around Tesla currently, there’s no need to worry if you’re a shareholder.
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For starters, the company reported positive earnings early this year; its revenue jumped from US$10.389 billion in FY2021 to US$18.76 billion in FY2022. Earnings per share also increased to US$2.86 from 93 cents last year.
Not only that, but the figures also managed to beat analysts’ forecasts of US$17.8 billion in revenue and US$2.26 in earnings per share.
Tesla also reported a net income of US$3.32 billion, a whopping 658% increase from the $438 million reported last year. This was the company’s strongest performance in its history, despite facing supply chain, transportation, labour, and manufacturing issues.
In spite of these bottlenecks, Tesla has planned to increase its annual growth by 50%. Moreover, it has managed to reduce its total debt, while increasing its cash flow generation to US$2.2 billion.
How Musk plans to buy Twitter
While Musk is the richest man in the world, much of his fortune lies in Tesla stock, where he owns 21% of the company.
To fund the Twitter deal, he sold US$8.5 billion worth of Tesla shares and borrowed over US$7 billion in funding from friends and investors. As mentioned, Musk has pledged his Tesla shares as collateral to raise funds and has managed to secure US$25.5 billion of fully committed debt.
Despite diluting his stake in the company by 5.6%, he still owns over 15% of the company and is still the biggest shareholder.
What will happen to Twitter after the takeover?
According to Musk, the acquisition is not for financial reasons. Rather, he said that he plans to make the platform “an inclusive arena of free speech.”
“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,” Musk said in a statement.
“Twitter has tremendous potential — I look forward to working with the company and the community of users to unlock it."
Additionally, Musk has said that he will be bringing new enhancements to the platform by “adding new features, making the algorithm open source to increase trust, defeating the spam bots, and authenticating all humans.”
He has also talked about adding an edit button for tweets and would also reverse Twitter’s ban on Donald Trump.
He also plans to explore new ways of generating revenue, including charging government and commercial users a small subscription fee and introducing new ways to monetise tweets that contain important information or have the potential to go viral.
This comes as Twitter has been struggling financially since it became a publicly-traded company in 2013. In fact, it has only turned a profit in two years: 2018 and 2019. Last year, the company reported a loss of US$221 million.
What’s more, the current 200 million user base is much smaller than competitors like TikTok and Facebook, while its revenue from digital advertising pales in comparison to juggernauts like Facebook and Google.
In Musk’s earlier tweets that were later deleted, he also mentioned slashing Twitter Blue premium subscription service, banning advertising, and including Dogecoin as a payment option.
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During his filing with the Securities and Exchange Commission, he made clear of his intention to take Twitter private: “since making my investment I now realise the company will neither thrive nor serve this societal imperative in its current form. Twitter needs to be transformed as a private company”, he wrote in a letter.
According to financial experts, taking Twitter private would give him more flexibility to make big changes to the company without public scrutiny. Additionally, the company does not need to report its financial information to the Security and Exchange Commission or adhere to its rules.
It was also reported that during a presentation to investors, Musk said that Twitter's earnings were too low. He plans to diversify Twitter's revenue and cut the company's reliance on advertisement revenue.
However, the takeover isn’t without backlash; questions have been raised around what would happen to government regulations all over the world on issues such as misinformation, online harassment, and terrorism, given Musk’s stance on free speech.
There are also concerns on how Musk could use Twitter to shape public opinion and political speech, while having access to the personal information of millions.
Can you still buy Twitter stock?
Twitter’s stock is still trading on the New York Stock Exchange (NYSE), so you can still buy its shares if you want to. At the time of writing, Twitter is trading at US$37.39 per share.
However, assuming that Musk goes through with his plan to take Twitter private, investors wouldn’t be able to buy Twitter stocks anymore. Existing shareholders stand to earn US$54.20 per share.
Bear in mind that the deal will take at least a few weeks to go through, and there’s also the possibility that the deal could fail (Musk has said that the deal is temporarily on hold).
Matthew Tuttle, CEO of Tuttle Capital Management in the U.S, urged investors not to buy Twitter because of the unpredictable nature of the deal.
“Investors should not buy Twitter,” he said to Money via email. “If the deal does not go through, which is a big IF when dealing with Elon Musk and all the baggage that comes with him, the downside is pretty huge.”
David Sekera, Chief U.S. Market Strategist for Morningstar also agrees: “Buying the stock of a company before it’s expected to get acquired involves a lot of volatility, and should only be taken on by investors with a tolerance high enough for that risk.”
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