The potential takeover of Twitter (NYSE:TWTR) has overshadowed the social media company’s financials. Twitter lost millions of dollars last year due to a one-time charge. On an adjusted basis, Twitter produced earnings of $165 million, or $0.20 per share. Again, nothing to write home about. Therefore, take the hype surrounding TWTR stock with a grain of salt.
Right now, TWTR stock will largely trade in line with expectations regarding the merger. Twitter agreed to be taken over at $54.20 a share. Despite the topsy-turvy nature of the markets, the bid price still represents a significant upside from its last closing price. However, if the deal does not occur, you could be left holding the bag.
Elon Musk has said that he is concerned about bot accounts. Twitter says less than 5% of reported monthly active users are bots, while Musk retweeted a study suggesting about 50% of Joe Biden’s followers are fake.
On May 25, Tesla filed more information with the U.S. Securities and Exchange Commission and hinted that Elon Musk was ready to move forward with this deal. The filings on that day revealed that Musk had secured funding to buy the company without incurring personal debt.
Soon after this, Musk’s lawyers wrote to Twitter asking for specific numbers about fake accounts on the Twitter network. According to his lawyers, Twitter refused to provide any such information.
There has been a slowdown in Twitter usage and its growth rate. This is frustrating because it takes away money-making opportunities, incentivizes less advertising spending, and risks the company experiencing consistent negative free cash flow. Therefore, the Elon Musk deal is a great way for investors to cash out their positions. Hence, a small position will not hurt. But do not commit anything beyond that.
| Ticker | Company | Price |
| TWTR | Twitter, Inc. | $37.97 |
Twitter Needs to Keep Growing
Musk has been thinking about buying Twitter for a while now and it is still unknown if he will act on it. However, one thing we can envision is the post-merger scenario and what the company needs to do to keep solvent.
In early 2021, Twitter announced its revenue and active users had been greatly improved. The company also set its ambitions to keep growing at a healthy pace.
When the pandemic occurred, most social media companies did extremely well because businesses began to see a rise in people working from home. This meant more content was being watched, which translated into more revenue for them.
In 2020, Twitter reported $3.7 billion in revenue and 192 million “monetizable daily active users,” or mDAUs. The company has stated that it wants 315 million active users and wants to make $7.5 billion in revenue in 2023.
However, things have not gone exactly according to plan. As of 2021, Twitter had 214.6 million DAUs. But growth fell sharply to 11.8% from 27% in the prior period. More importantly, the company’s cash flow is not improving; it had a negative $370 million cash flow position at the end of 2021.
Will Elon Musk Buy Twitter?
Elon Musk believes he has the opportunity to grow Twitter’s paid subscriber base and transform its revenue model. Since Twitter relies on ads for much of its revenue, it will be a significant change.
He’s confident he could triple Twitter revenue from 2023 to 2028, translating into $26 billion and 931 million users. At the same time, Elon Musk has told banks financing his $44 billion deal that he will crack down on executive and board pay at the social media company to push down expenses. He also plans on developing new ways for the public to access Twitter’s data and other aspects of its business. That will lead to further monetization of the platform.
However, it is worth noting that a leveraged loan and high-yield bonds will bankroll the investment. According to Bloomberg Intelligence, Twitter’s annual interest expense will stand between $750 million and $1 billion if the merger goes as planned. It’s a heavy debt load for a company already grappling with slowing user growth.
TWTR Stock: Buy a Small Position
Regardless of whether Elon Musk goes ahead and purchases Twitter or not, there are several important fundamental issues the company needs to address. Profitability is the foremost.
Twitter’s stock value has plummeted since the start of the year and several important issues need to be addressed. The company needs to focus on increasing profits. If Twitter can’t do this, the long-term picture will remain bleak.
On the publication date, Faizan Farooque 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.
