Elon, Twitter, and Tech
Disclaimer: At the time of writing this article I have a long position in Twitter. This is not meant to be a buy or sell recommendation. I am not a financial advisor. I am an idiot. You should always do your own research and work and talk to a professional prior to making investment or fiduciary decisions instead of reading a blog on the internet.
On Twitter
The news has been pretty dominated by Elon’s bid to purchase Twitter at $54.20/share. It’s the talk of the town for a variety of reasons. For one thing, Elon melts people’s brains depending on whether you love or hate the man. Secondly, whenever a large company is purchased by a billionaire or a billionaire flies into space or something it tends to capture the ire or imagination of the populace.
My position on the issue is different. I’ve been a long believer in Twitter as a business and a unique social media company. Hence my long position in the company. My investment thesis was fairly simple: Twitter offers a unique microblogging platform for journalists, financial commentators, sports commentators, and for quick witted self employed individuals that cannot be easily replicated. Most of these users have spent years accruing their followings and have now become “stuck” with high switching costs to the platform. Opportunities such as twitter blue, tip jar, spaces, etc could be used to lever the platform to give power to these users to draw more activity on the platform increasing advertising revenue in the same way that content creators on YouTube generate a flywheel for that business.
It’s been a long road for me with Twitter. Essentially I feel that management has managed to fumble the football every chance they’ve gotten. Revenue has been increasing, due to adjustments to the advertising technology stack implemented recently, but nothing accretive to become a driver for content or eyeballs. The social media/streaming landscape has only gotten more complex (especially during 2020 specifically), with TikTok and SnapChat becoming leaders in Gen Z attention. TikTok especially seems to be everywhere. Furthermore, social media companies which rely on traffic to produce advertising revenue are subject to what their real cost constraint is, which is time—the same problem that plagues streaming services. Everything is a competition for your time and eyes. In 2020, when time was unnaturally inflated, more players entered the space—every cable channel needed a streaming platform because of Netflix’s robust profits and similar to a commodity cycle we’re seeing a bust with the contraction of the primary resource: time. While there is some overlap since you can troll TikTok while binging something on Netflix, overall you usually are focusing on one or the other primarily. Therefore, the case to bring users onto your platform through additional drivers other than shouting your hot take into the netherverse (which was so 2007 I guess?) has essentially become stronger over time.
This grand competition for time equity is why I love YouTube so much as a business model. YouTube was always a place I wanted to go because I knew there was reliable content I liked to watch for “free”. All I had to do is watch some Red Lobster commercials or whatever. Twitter really didn’t roll out any tools to fully empower their users like YouTube did though, nor did it enable Twitter as a viable influencer career. If there's one thing my Twitter position has taught me its that if you're looking for a company “just like company A”, then buy company A and don't sweat the price.
Twitter was, is, and may possibly always be the place for you to advertise your brand with a viral tweet while you re-direct your followers to a secondary location to monetize. The middle man in this instance is sort of licking the food off the floor in terms of advertising exposure compared if they retained the eyes or drew them back every day consistently searching for new content or exclusive content. It’s true there are some issues with this way of monetization—namely the fact that Apple is going to have a 30% take rate on all purchases via iPhone, but that’s probably a different rant.
Enter Elon
When Elon first announced his stake in Twitter, it made me apprehensive. Mainly because I feared (and I was correct) that the Twitter employee base would have their brains melt and would devolve into essentially becoming obsessed with not being owned by Elon. To be totally honest I do not mind Elon Musk, but there’s a reason why I do not invest in Tesla—he’s too polarizing and too distracted as a CEO…and he tweets too fucking much. I think he’s highly intelligent, a great engineer and an acceptable businessman, but not who I want to steward my money personally.
Elon’s offer to purchase twitter at 54.20 a share is reasonable to me. There's some debate on this among the investment world. I did some quick calculation of the enterprise value of twitter based on their last filing and roughly calculated it to be 41 Billion versus the 43 Billion that was put on the table. I used the current market capitalization of 36.98 Billion (at the time of writing this), which is elevated compared to when this whole thing first started due to the interest in the position from Elon's potential involvement and later purchase.
I understand there is an argument for “intrinsic value” of twitter and their future growth, but for me personally I haven’t seen the execution of diversification of revenue that makes me comfortable enough to buy an argument that Twitter is a compounding machine that’s ready for take off. To be fair, I generally prefer diversified revenue sources instead of some reliance on one source of income (i.e. advertising), which works against Twitter currently and is why their subscription expansion was a important part of my thesis. Additionally, Jack is no longer the CEO. That is probably for the best, since you probably don’t want someone who is almost openly belligerent to Congress as the CEO of a social media company…but god dammit if it doesn’t make my anarchist heart sing with joy. Watching that man make a mockery of their hearing was probably more entertainment than I’ve ever gotten out of Twitter itself. Plus, let’s face it—Jack wants to work on bitcoin now…and I have no issue with that. The fact does remain that I’m a very big can of founder/CEO as a steward for the company. I tend to enjoy companies with high concentrations of control as long as the CEO is not also a psychopath. Next, most things I’ve heard from users with a lot of followers is that the monetization that twitter Blue allows is clunky and not well streamlined for them to really capitalize on or expand. Finally, I’m generally pessimistic on the near term future of advertising due to economic pressures and so I think that you’ll see an overall decrease or constriction from advertisers. I would imagine that with what budgets they have, they’d rather put more spend to Instagram, TikTok and SnapChat where there are more concentration gen Z users with theoretically higher disposable incomes than Twitter.
Elon himself has a lot of stake in Twitter, and I’m not talking about his shares. Elon’s Twitter account has basically sold Tesla, since Tesla doesn’t have a large marketing or sales spend if any at all. It’s all through the clownish ravings of Mr. Musk at times, and hate it or love it, it has been effective. News outlets love to write about him, and he loves to be written about because every piece of press is more free advertising to potentially put a butt in a Tesla. I believe him when he says that he sees the potential in Twitter, and I honestly think that he would try to be a good steward of the company. I’m also not really opposed to him liquidating the non-employee seats of the board, since again, there hasn’t been execution. He even promised to give Burry his checkmark back.
Exit Tech
Finally, there's some issues I have with future valuations of growth stocks in general. Maybe Twitter is a compounding machine. I can be wrong…I have been wrong multiple times in the past. However, it’s not 2020 anymore. Tech isn’t as highly sought after as it once was in the past—and so we must deal with multiple compression and what growth/tech names are being valued at in a rate raising, liquidity tightening market.
All value is relative and based on the conditions of the present situation. Whether it is a tulip mania, or a crushing recession, we tend to look at valuation in terms of our current situation and project what we perceive a things value given current information. This is how markets (should) work. Essentially what I’m saying is that what Twitter’s perceived value was last year isn’t what it’s value is necessarily going to be six months from now.
Although Twitter has become profitable recently, you can’t make an argument that their a free cash flow megalith like Meta Platforms (formerly Facebook). The Zuck-machinr was spitting out approximately 30 Billion with a B in free cash flow last time I checked. Despite this Meta has dipped 30% this year alone (let's ignore the hesitation on all the metaverse talk, Zuck has earned a little benefit of the doubt in my opinion). Netflix, which just reported their earnings as I’m writing this, has been absolutely waxed at a 52% decline, which has been a darling until the last six months or so. The reality of the market is that tech and software as a service (SaaS) names are going to enter a period of correction and re-evaluation and high flying price/sales ratios of 30-40x are simply no longer attainable. I think it's safe to say, and I say this as someone with a lot of growth exposure, that we may have got a little ahead of ourselves. Basically, there has to be some reliable money printing and growth happening for investors to be interested in these names, and I’m not willing to bet that Twitter is the dark horse among the many.
Overall, I must admit that my position has changed. I would find a buyout from Elon pretty entertaining and pretty reasonable. The purchase is set to a fair price, even more so if you’re pessimistic like I am at this point. There’s likelihood that Elon will make another offer that may be more attractive, since suddenly his interest has made Twitter valuable just so he cannot have it. Maybe the board will listen to that offer. But the biggest thing is, Elon tweets all the time. So much he’s gotten in trouble with the SEC. If there’s one thing he knows, even to his detriment, it’s tweeting.