Well, that happened fast. Just two weeks ago, Tesla (NASDAQ:TSLA) CEO Elon Musk made a public offer to buy social media giant Twitter (NYSE:TWTR). This was on the back of announcing his own Twitter stock holdings. A week later, Musk provided funding proof for the offer. And after another week of intense speculation, Twitter accepted.
Now the world’s richest man owns one of the world’s largest social media platforms.
I could write an entire piece based on the sociopolitical implications of this acquisition alone. But this is an investment newsletter, not a social or political one. So, let’s do what we do best and find out how to make money from Musk’s Twitter acquisition.
Fortunately, the investment implications here are straightforward. Specifically, we believe there are three money moves you need to be making right now to profit from Elon’s recent purchase.
One involves making a quick buck off the buyout. Another involves making big money in the long run. And the final involves protecting yourself from potentially losing a lot of money.
Let’s take a deeper look.
Buy Twitter Stock for the Arb Spread
The first money move you need to make right now is simple: Buy Twitter stock.
Why? There’s an arbitrage opportunity here.
The stock is trading at $51.70. Musk’s accepted buyout offer comes with a $54.20 price tag. That implies 5% upside from the current to the buyout price. Therefore, if the deal does go through, Twitter stock will rise 5% from here.
At this point, we think there’s essentially no way this deal doesn’t go through.
Musk has the funding. The board has accepted the offer. The media has called it a done deal. And all this went down with such a public spotlight. Any party’s back-out would be viewed very unfavorably in the court of public opinion.
In other words, we think this deal is baked in. That means as both sides work through the legal logistics, Twitter stock will likely rise 5% toward the buyout price.
Don’t overthink this one. Buy Twitter stock. Wait a few weeks. Make a quick 5% in a choppy market. Sometimes, making money in the markets can be that easy.
Buy Snap, Pinterest, and Meta Stock for Long-Term Returns
The second money move you need to make right now requires a little more of an explanation. Buy all of Twitter’s core competitors, including Snap (NYSE:SNAP), Pinterest (NYSE:PINS) and Meta (NASDAQ:FB) stock.
Musk’s Twitter offer came at a huge premium with a fairly steep valuation. At $54.20, the buyout price pegs Twitter’s “fair value” at ~46X 2023 estimated earnings.
No other social media stock trades that richly today.
Snap stock trades at 35X 2023 estimated earnings. Pinterest trades at 15X. Meta trades at 13X. Therefore, if Twitter’s peers trade at valuations on par with its takeover valuation, then Snap stock would rise over 30%. Pinterest stock would rise more than 200%, and Meta stock would rise over 250%!
To make things even more compelling, two of those companies, Snap and Pinterest, are growing far more quickly than Twitter. And therefore, those warrant an even bigger multiple than Twitter stock.
Basically, Musk’s acquisition of Twitter underscores that valuations across the social media sector are cheap — too cheap.
That’s why, in our Innovation Investor advisory portfolio, we own social media stocks not named Twitter. On the heels of this buyout, we think social media stocks are primed for some big near-term rallies.
We’re talking potential doubles over the next few months.
So, don’t overthink this one, either. Twitter’s go-private valuation implies huge upside potential for the company’s peers via multiple expansion. Buy those competitors. Wait for that multiple expansion. Score big returns in the medium term.
Be Mindful With Tesla Stock
The third money move requires a bit of creative thinking, so bear with us. If you own Tesla stock, be careful. (And we say that as Tesla stock owners).
Elon Musk is an extraordinary human being. Still, he’s only human. And humans have limits. Musk now runs Tesla, SpaceX, The Boring Company, Neuralink and Twitter.
That’s a lot for one person to juggle. To be sure, Musk has successfully managed all but one of those companies for several years now. But adding just one new item to the mix could make it all come crashing down.
We’re somewhat concerned about Tesla here and now.
Musk is the still the CEO of Tesla. But he’s clearly turning his focus to Twitter. And based on his own account, it appears he has a special passion for reinventing Twitter to be the free-speech-based social media platform he believes the world needs right now.
Therefore, it seems entirely probable that Musk diverts some of his attention away from Tesla and toward Twitter.
Is TSLA Doomed?
This attention shift away from Tesla could not come at a worse time.
Supply chain disruptions are creating huge headaches right now; so are soaring lithium and nickel prices. Meanwhile, with its recent batch of Covid lockdowns, China is creating huge regulatory headwinds. And Tesla’s Shanghai factory appears to be right in center of that struggle. Not to mention, true Tesla competitors are showing up to the scene this year — namely, Lucid (NASDAQ:LCID) and Rivian (NASDAQ:RIVN). And those CEOs are exclusively focused on ramping their companies to beat out Tesla.
If anything, Tesla needs its CEO to be more hands-on in 2022. But it looks like he will be less so.
Does that mean Tesla stock is doomed? No, far from it. As we said earlier, we own Tesla stock in our model portfolio.
But we do have a “Hold” rating on it. That’s mostly because we’re concerned about how the company will operate in a much tougher environment in 2022. And Musk’s focus on fixing free speech won’t make things any easier.
As such, if you own Tesla stock, be mindful of these risks. Don’t rush out and sell it. But proceed with caution. And pay close attention to how strongly the company executes this summer.
The Final Word on the Twitter Buyout
Musk’s Twitter buyout promises to shake up the digital media industry and, more broadly, how the world views free speech online. It will have profound implications across multiple companies and industries.
Call me after 5 p.m. on a Friday. And we can grab a drink and wax esoteric about how this acquisition will redefine free speech standards… But for now, its 6 a.m. on a Tuesday. And I’m much more focused on making money moves.
So, let’s buy Twitter stock. Let’s buy Snap, Pinterest and Meta stock. And let’s proceed carefully with Tesla.
Above all, let’s make some money with those moves — and use that to buy a drink on Friday night. How’s that sound?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.