Twitter (NYSE:TWTR) stock, the social media platform for public self-expression and real-time conversation has been making headlines for some time after the deal with Elon Musk to acquire it for $54.20 a share and take it private.
Here are three main factors that weigh in TWTR stock now — that are of great importance. First, shares of Twitter have become in my opinion uninvestable. Why is that? Take for example the stock market crash yesterday that sent all major U.S. stock indexes tumbling and Nasdaq declining nearly 5.0% losing about 650 points.
What did TWTR stock do? It gained 2.65% closing at $50.36. We know that the offering price of $54.20 in cash by Elon Musk is the ceiling for Twitter shares now. Does this mean it is a good idea to buy shares at the current stock price below $54.20 and book a certain return?
In theory, this is correct but what Elon Musk had done with his offer is to remove to a great degree the upside potential of Twitter, put a floor on its stock price, and literally write a check for savvy investors who trade options. The reason is that it is not rocket science to expect TWTR stock to remain in a tight range between let’s say $50-$54.20 a share until the mechanics of the deal are done.
This translates to low volatility for the stock and options traders can bet on creating option trades that take advantage of this relatively low volatility. It makes no sense to buy TWTR stock in a rally above $54.20 should that occur, and not sell it short as the offering price of $54.20 acts like a magnet pulling it back.
Second, Q1 earnings were mixed and missed on revenue. Revenue of $1.2 billion was lower than $1.23 billion expected, according to Refinitiv and although adjusted earnings per share of 4 cents came in at better than 3 cents expected.
Monetizable Daily Active Users (mDAUs) reported were 229 million compared to 226.9 million expected, Twitter reported a loss from operations of $127.83 million compared to a gain of $52.18 million in operating income in the same quarter a year ago.
The cost of revenue and total costs and expenses increased significantly. Having an increase of 16% year-over-year in revenue and a 35% year-over-year increase in operating expenses does not look good or bullish.
The third factor is that Elon Mush paid a large premium to acquire Twitter and made a very costly mistake. He could have waited for the Federal Reserve to announce its expected rate hike and then make a bid.
In this scenario, if TWTR stock most probably would have tanked in tandem with the stock market, Elon Musk could offer a lower price, let’s say $45 a share and not $54.20. In business making, costly mistakes give extra lessons, and patience is a virtue.
On the date of publication, Stavros Georgiadis, CFA 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.