Investors may consider taking this story with a grain of salt. However, at least one well-known short-seller has made the case that Elon Musk’s buyout of Twitter (NYSE:TWTR) could be in danger. If that’s the case, TWTR stock could face 50% downside from current levels.
The short-seller? Hindenburg Research, the same company that nailed the short in Nikola (NASDAQ:NKLA). According to Hindenburg, “We believe that if Elon Musk’s bid for Twitter disappeared tomorrow, Twitter’s equity would fall by 50% from current levels … Consequently, we see a significant risk that the deal gets repriced lower.”
If you’re wondering whether Hindenburg is a seller, the answer is yes. The firm is actively shorting TWTR stock. As a reminder, the company agreed to a $44 billion buyout with Tesla (NASDAQ:TSLA) CEO Elon Musk for $54.20 a share.
If the deal goes through, that should effectively limit Hindenburg’s losses at that level, which is up about 15.3% from current levels. Hindenburg’s argument hinges on several factors, including:
- Twitter recently announced disappointing quarterly results and misstated its user numbers for roughly three years.
- The $1 billion break up fee is not enough to deter Musk should he seek a lower deal.
- With these two considerations combined, Musk has leverage to negotiate a lower price for the deal.
Why does point No. 3 matter? Because the rest of the market is engulfed in a bear market. There’s no doubt that if Musk pulled the plug on the deal, TWTR stock would suffer greatly as a result. It has tried in the past to sell itself, only to come up empty handed. No one has seemingly challenged the Musk offer with a higher bid, either.
That said, so far Musk hasn’t indicated he has any intentions of pulling back on the deal.
In a recent interview though, Musk did mention that he doesn’t believe in permanent Twitter bans — specifically in reference to former President Trump. Co-founder and former Twitter CEO Jack Dorsey backed Musk on this belief.
Musk said of Dorsey: “He and I are of the same mind that permanent bans should be extremely rare and really reserved for accounts that are bots or spam scam accounts.”
Some question whether the stock would actually fall 50%. If we weren’t seeing an implosion in growth stocks, I would doubt it myself.
For reference, a 34% drop in TWTR stock would take it below the 2022 lows. It would need a 57% decline from current levels to revisit its Covid-19 lows, though.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.