Popular short-format social media company Twitter Inc. (TWTR, Financial) has seen its share price spiral downward over the past year. Some investors were even beginning to eye it as a potential value opportunity. At one point, shares were trading at nearly half of their GF Value.
The key issue was, what catalyst event could appear and make the general market reassess Twitter’s value? We got our answer to that question in an unexpected format on Monday, when it was revealed that Elon Musk, the CEO of Tesla (TSLA, Financial) and SpaceX as well as an avid user of Twitter, acquired a 9.2% passive stake in the company, becoming its largest outside investor.
Following this news, shares of Twitter spiked nearly 29% to trade around $50.60, though the stock is still undervalued based on the GF Value chart.
With Musk rumored to be taking an activist stance on the stock, could this be the beginning of a bright new future for Twitter, or is the brief value opportunity that appeared earlier this year already gone?
Musk’s Twitter woes
The Tesla CEO’s decision to become a major shareholder of Twitter may come as a surprise to his 80 million-plus followers on the social media platform, who have seen him be highly critical of the company in the past, even tweeting that he was considering creating his own social media platform.
What could his beef be with a platform he utilizes so frequently? Musk believes that Twitter is limiting his free speech; he considers it to be Twitter’s obligation to serve as a public town square of sorts, allowing anyone to tweet anything for the entire internet to see:
“Given that Twitter serves as the de facto public town square, failing to adhere to free speech principles fundamentally undermines democracy. What should be done?”
The argument about whether private social media companies should prioritize enhancing free speech or complying with government regulations, protecting users’ safety, etc. is beyond the scope of this discussion. The only part that is relevant here is the fact that Musk has clashed with regulators about his use of Twitter in the past, and he’s not happy about it.
To that end, Musk told his followers that he was “giving serious thought” to creating his own social media platform, ostensibly so that he would no longer have his social media activities monitored by financial regulators.
Shareholder activism or acquisition?
There are two main possibilities that analysts are tossing around as to why Musk has decided to acquire a significant stake in Twitter despite being opposed to the way the company is being run.
The first is that he may be preparing to take a stand as an activist investor. Certainly, activist campaigns have been launched with lower stakes than 9.2%, but these have mostly been cooperative campaigns; in order to take a controlling interest in the company and push changes of his own accord, he would need to increase his stake above the 20% mark, according to U.S. GAAP accounting laws.
The second possibility is that Musk could be gearing up to acquire Twitter in its entirety. “Musk's actual investment [in Twitter] is a very small percentage of his wealth, and an all-out buyout should not be ruled out,” wrote CFRA analyst Angelo Zino, who covers Twitter and social media. While he wouldn’t be lacking in the necessary funds for such an acquisition, regulators might take issue with it, though.
A third possibility is that Musk’s Twitter investment might turn out to be a short-term holding or a truly passive one, though this is unlikely, since he would have no financial need to try gaming the stock market or hoping for Twitter to be a long-term growth investment.
Volatility ahead
Before the announcement that Musk has suddenly become Twitter’s largest shareholder, the stock was beginning to look undervalued. Now, the stock has shot up nearly 30% in one day, but it is still trading below its GF Value. Is there an opportunity here for investors?
The issue with Twitter stock now, in my view, is that Musk’s involvement greatly increases the risk of volatility. This volatility could turn out to be on the upside or the downside, depending on how things play out.
We don’t yet know if, when or how the Tesla CEO plans to push for changes in Twitter’s operations, what the real results of such a push would be or how the market would react to such changes. Investors who put faith in Musk without considering other circumstances could be caught off guard.
Update: On April 5, which was after this article's publication, it came to light that Musk has indeed struck a collaborative agreement with Twitter's top executives, landing himself a seat on the company's board of directors. “Through conversations with Elon in recent weeks, it became clear to us that he would bring great value to our Board,” CEO Parag Agrawal said in a tweet. The board seat comes with the caveat that Musk not amass more than a 14.9% stake in the social media platform, which should prevent him from taking over Twitter the same way he did Tesla.
