The saga of Elon Musk’s on-again, off-again effort to take over Twitter Inc. (TWTR, Financial) has absorbed the attention of much of the financial media and tech analyst community for months. Having finally consummated the deal late last month, Musk was quick to shake things up at the now-private social media company. Within days of taking the helm, he had fired most of Twitter’s remaining executives as well as half of the company’s 7,500 employees.
Musk has also enacted a number of major operational changes, often seemingly on the fly. Some of these have already roiled Twitter users and observers. The decision this week to replace the company's hands-on process of verifying accounts with a simple paid subscription, for example, has caused considerable chaos.
With so many visible issues arising at Twitter in such swift succession, it is hardly surprising that Musk has faced unprecedented levels of media and investor scrutiny and public criticism. This in turn has caused considerable anxiety among investors in Musk’s other companies, especially publicly traded Tesla Inc. (TSLA, Financial). The electric vehicle maker has already seen its stock weighed down by Twitter uncertainty. Some analysts now fear that further chaos and confusion at Twitter will risk dragging down Tesla’s high-flying stock.
Musk’s antics threaten Tesla’s brand
Even Tesla’s most bullish analysts have struggled to find anything good to say about Musk’s takeover of Twitter. The buyout itself has put pressure on Tesla’s stock price. Musk has sold $19 billion worth of his Tesla holdings since April, largely to fund the $44 billion acquisition. While that specific selling pressure is likely to ease now that the deal has closed, the EV maker still faces significant headwinds thanks to Twitter.
On Nov. 10, Wedbush removed Tesla from its “Best Ideas List” of stock recommendations. Calling Twitter an “albatross” around Tesla’s neck, Wedbush tech analyst Dan Ives slashed his price target to $250. Ives subsequently took to Twitter to explain the decision:
“And now sitting on top of the peak of the mountain with Tesla in a massive position of strength Musk has managed to do what the bears have unsuccessfully tried for years...crush Tesla's stock by his own doing in what we view as a purely painful dark situation…We still believe in the long term bullish thesis on Tesla, that view is unchanged. BUT this Twitter madness needs to end…brand destruction is our biggest worry with this Twitter circus show. It’s that simple and I can’t ignore it for Tesla stock.”
According to Ives, Musk’s antics at Twitter risk doing irreparable damage to Tesla’s brand, which is inextricably intertwined with his personal image and reputation. Tesla has long acknowledged Musk’s critical importance, regularly citing him as a major key person risk for the company, so Ives has plenty of justification for his fears.
Betting on brand resilience and buying the dip
Not all analysts are as convinced of the danger, however. According to Pierre Ferragu of New Street Research, the risk Musk’s Twitter difficulties pose to Tesla are overblown:
“I don't get the brand destruction point. Musk's popularity is still massive, supports the brand and I see no evidence of his activism on Twitter hurting this. Laid-off twitter employees and traumatized influencers are not likely to have ever been Tesla buyers anyway! The stock reflects two things: 1) Fears that Elon ‘loses it’ and Tesla ops suffer; 2) fears that Elon sells more stock. Unless truly worried about 1), or about 2) driving negative near-term momentum, the rational investor would buy the dip, not lower a target price!”
Ferragu sees little risk to Tesla sales growth from Twitter, dismissing the people upset by Musk’s recent actions as a small minority that were unlikely to become Tesla customers anyway. However, the risk of collateral damage to Tesla’s brand goes far beyond the small number of individuals Ferragu cited.
The Twitter drama has been playing out publicly and in real time. As a high-profile public figure, interest in Musk’s dealings goes far beyond tech insiders. Thus, buying the dip could prove to be quite dangerous.
My take
Tesla’s lofty stock price relies on investors’ confidence in Musk’s ability to deliver massive and sustained growth. Musk’s Twitter problems are, at best, a distraction from delivering on Tesla’s big growth promises. With a market capitalization in excess of $600 billion despite recent reversals, Tesla is still the world’s most valuable automaker by far.
Any loss of confidence could deflate the lofty stock, in my assessment. Twitter remains an overhang that investors can hardly ignore.
Trade carefully!
