Is Now A Good Time To Buy Twitter Stock? Yes, Even If Elon Musk's Acquisition Fails (2024)

The share price of Twitter, Inc. (TWTR) is little changed year-to-date, a far cry from its internet peers, who have mostly seen their stocks plummeting amid the Great Reset. Twitter shareholders have Elon Musk to thank as the enigmatic Technoking of Tesla, Inc. (TSLA) disclosed his approximately 9% stake in the social media platform in early April.

The revelation triggered a powerful wave of copycat investors and momentum traders plowing into TWTR stock, sending it soaring. The share price of TWTR jumped 27% on the first trading day after the news of Musk's filing. After some sliding on profit-taking, TWTR stock spiked upwards again a week later on Musk offering to buy Twitter for $54.20 per share in cash. TWTR stock hit a YTD closing high of $51.70 on April 25, a nice bump from the YTD closing trough of $32.42, after Twitter's board unanimously approved Musk's offer of $44 billion for Twitter.

While the $54.20 offering price is likely inspired by "420" - well known in cannabis culture as the supposed best time to get high - it was very close to the average at $53.91 Twitter had traded over the past year until 1 April 2022, the last session before Musk's disclosure of a stake in the company. Nonetheless, although it was 67% off the two-year bottom at $32.42, it was 34% lower than the 52-week high at $72.45.

Thus, while Musk's proposed acquisition has helped prop up the share price performance of Twitter many shareholders, especially those with a long-term view, are likely to be unsatisfied with the buyout price of $54.20. Yet, shareholders who have been with Twitter for a few years may consider the acquisition as an excellent opportunity to receive cash for redeployment to a plethora of other stocks (there are plenty to choose from amid the broad market bloodbath).

After all, TWTR stock has largely outperformed its peers Meta Platforms, Inc. (FB) and Snap Inc. (SNAP) since the latter's public debut. In the five-year timeframe, TWTR stock is up 150%, while FB stock is only up 43%, and SNAP stock is down 36%.

The outperformance is starker when viewed on an enterprise value [EV] basis. Twitter's EV is higher by 222% since Snap's IPO, while Meta Platforms, the parent of Facebook, has seen its EV rise by 34%. Snap's EV is lower by 11% during the same period.

Scenario A: Elon Musk's Takeover of Twitter Is Completed

Of course, the shareholders of Twitter will only pocket the cash if the deal by Elon Musk, which is expected to close in 2022, goes through. There has been plenty of "will he, will he not" drama twists since Musk formally made the buyout offer. However, Musk had by April 21 secured more than $46 billion in financing to support a tender offer for all of Twitter's stock. In late April, Musk claimed to be "inundated" with offers from potential equity partners to collaborate on his $44 billion deal with Twitter.

Amid skepticism about whether the deal will close as Elon Musk kept harping on Twitter's bot issue, Twitter announced on May 17 that it is "committed to completing the transaction on the agreed price and terms as promptly as practicable." In a sign that the chances of the deal happening had improved, prominent short seller Hindenburg Research said later that day it closed its short position on Twitter. The next day, Bloomberg reported that Twitter would not renegotiate the takeover's $44 billion price tag, with executives saying there was "no such thing" as a deal being "on hold."

On Wednesday, an amended ownership filing from Musk revealed that he had raised his aggregate equity commitment for the takeover, bringing the aggregate principal amount of the equity commitment in the $44 billion proposed acquisition to $33.5 billion. TWTR stock soared post-market on the news, as market players deemed the move as a clear indication Musk intended to close the deal.

Scenario B: Elon Musk's Twitter Acquisition Bid Fails

The share price of TWTR would inevitably suffer from a knee-jerk drop if the acquisition bid by Elon Musk is unsuccessful. However, assuming the deal was called off by Musk, Twitter stands to pocket $1 billion from the former. This is just around $160 million shy of the total operating income ($1.16 billion) earned by Twitter in the past five years (2017-2021). Twitter can use the $1 billion to finance its R&D expenses which have averaged $780 million per year in the last five years ($1.25 billion in 2021).

Parag Agrawal, who has recently taken over as the Chief Executive of Twitter, was formerly the company's Chief Technology Officer. As the new leader of Twitter, and with Jack Dorsey out of the board of directors, Agrawal will be able to execute his ideas more freely than before. The $1 billion in cash will come in handy.

Furthermore, the rampant media coverage of Elon Musk's purchase of Twitter shares followed by his acquisition bid has helped the platform gain free publicity, whether the deal is completed or not. Google Trends showed interest in "Twitter" soared to a year's high in the week of April 24-30, 2022.

Meanwhile, The Information reported that Agrawal "established new company-wide performance ratings and ways to measure the speed of product launches, with the aim of holding teams accountable." This, coupled with the ouster of four deputies since Agrawal assumed the leadership of Twitter, could lower the company's share-based compensation [SBC], which isn't out of line with peers in any case. Twitter's SBC is around 14% of its quarterly revenue in the past three years, higher than Snap's 9% but lower than Facebook's 29%.

In terms of SBC per employee, Twitter is also in the middle at $84K per employee, versus Snap's $193K per employee and FB's $127K per employee.

The more moderate issuance of SBC at Twitter has played a part in the slower increase in Twitter's outstanding shares versus Snap. Meta Platforms' decline in outstanding shares is due to its share buybacks.

Over the past four years, Twitter has grown its employee count by 122%, the slowest of the trio. Meta Platforms Inc has nearly quadrupled its workforce. As its revenue has risen at a slower pace, Meta Platforms' revenue per employee change over the period has declined.

TWTR Stock Key Metrics

Looking specifically at the revenue growth, we can easily identify that Twitter has been turning in the weakest performance among the trio. For the first quarter of 2022, advertising revenue at Twitter rose 23% year-over-year to $1.11 billion, forming the bulk of the company's $1.2 billion total revenue. Thus, there have been loads of expectations for Twitter to make greater efforts to grow its subscription revenue. Some Wall Street analysts are even speculating that Elon Musk intends to significantly expand subscriptions such that the business model could be switched from advertising to subscriptions.

Twitter would also need to work on improving its free cash flow [FCF] to attract a better valuation in the longer run, sans an acquisition by Elon Musk. Its FCF has fallen from $1 billion in mid-2019 to a negative $625 million by the first quarter of 2022. Meta Platforms is akin to a cash-printing machine, with a solid FCF of $40 billion by the first quarter of 2022. Snap may be the newer kid on the block but it has a positive FCF of $203 million.

With Twitter's generally inferior business performance, it may thus be odd to know it has the highest price-to-sales ratio among the trio. A case may be made that SNAP stock has fallen too much too fast. However, we are focusing on Twitter here and as a long-time user of all three platforms, I reckon Twitter's relatively slow pace of innovation means that there can be much more room for improvement. Twitter's acquisitions thus far have also been the bolt-on type, unlike Meta Platforms which has seen its past acquisitions, WhatsApp and Instagram, develop into sizable businesses individually.

TWTR Stock Quant Rating

Seeking Alpha's quant system has rated TWTR stock as a Hold, putting it in the same league as FB stock, while SNAP stock is a Sell. Nevertheless, looking into the sector ranking, we see that TWTR stock is ranked 75 out of 226 in the Communication Services sector, five positions above FB stock and 131 positions higher than SNAP stock. Meanwhile, Match Group, Inc. (MTCH) is ranked 148th and Roblox Corporation (RBLX) is the worst of the lot here at 217th, earning it a Strong Sell quant rating.

According to Seeking Alpha, the overall quant rating is not an average of the factor grades listed. Instead, it gives greater weight to the metrics with the strongest predictive value. Comparing the factor grades given to TWTR, SNAP, and FB, it seems that Twitter stock was dragged down by its valuation and profitability.

Looking on the bright side, amid the souring market sentiment for tech companies delivering weaker growth, shareholders should be comforted that Twitter has scored an A- for EPS revisions. SNAP stock was punished after the camera company warned its second-quarter revenue and EBITDA would be below the low-end of its previous guidance, leading analysts to revise downwards their earnings estimates for Snap. TWTR's momentum score of B is also the best among the five names compared in the Communication Services sector.

Is TWTR Stock A Buy, Sell, or Hold?

With the uncertainty surrounding the deal completion, TWTR stock is trading at $40.17, less than a dollar higher than the $39.31 TWTR stock closed on April 1, before the public knew of Elon Musk's stake in Twitter. In other words, TWTR stock has a 35% appreciation if the acquisition is eventually finalized. If the deal is completed by the end of the year as initially guided, the annualized percentage gain is around 60%.

If Elon Musk reneges on the offer, Twitter gets to pocket $1 billion, which it can invest further into R&D or conduct more bolt-on acquisitions to help boost business growth. There may be a knee-jerk fall in the share price on the disappointment, but in the mid to long run, shareholders may benefit from giving the new CEO, Parag Agrawal, the chance to prove himself. The refresh in the senior leadership ranks could re-energize the social media platform.

Twitter's historical financial performance and innovation record leave much to be desired, but it also means the company has low expectations to meet and surprise on the upside. As Twitter's much touted new competitor Truth Social, which is operated by Donald Trump's media company and going public through a SPAC deal with Digital World Acquisition Corp. (DWAC), is still finding it challenging to gain traction, shareholders can heave a sigh of relief.

Truth Social may flounder even more if the former President gets reinstated on Twitter. Given that the @realdonaldtrump handle had amassed 88.7 million followers by the time Twitter suspended it in January 2021 after the 2021 United States Capitol attack, it is very likely that Trump would devote his time to Twitter instead of Truth Social if his Twitter ban is lifted.

With the previously distracted leader, Jack Dorsey, out of the picture, and CTO-turned-CEO Parag Agrawal showing his decisive self in revamping the management team, we may see Twitter change for the better at a quicker pace. Thus, I rate TWTR stock as a Buy.

ALT Perspective