About Twitter

Twitter is a huge social media company with a big blue bird as its logo. A lot of my friends either don’t have Twitter or don’t understand Twitter.

I mean, you go to Twitter.com or open the app, see a blue bird, a bunch of news links waiting to be clicked, with a “What’s happening?” waiting for you to type 140 characters at the top.

Type, click, retweet!

Oh, and Elon Musk just made a $43 billion hostile takeover bid to buy the entire company.

So, that’s cool.

It’s important to first note that Twitter’s primary revenue stream is selling advertisements. In fact, reportedly 85% of the company’s revenue comes from ads. This is a considerable amount and not very confidence invoking for an investor such as myself.

What if people stop liking Twitter and it becomes the new Myspace?

What if people get bored and start using Instagram (owned by Meta) more or Snapchat becomes the new predominantly used social media player?

As for the critics who don’t get Twitter or don’t think it’s very interesting, we get where they’re coming from.

While it would be hypocritical of us to say we don’t like Twitter (check out our awesome, daily updated Twitter page by the way!), it is nonetheless a platform with an iconic blue bird that is essentially a news and discussion platform. You “heart” some stuff, you tweet some stuff and get on with your day). It’s not special in that regard. However, it is a gigantic social media company with a considerable amount of historical user reach and retention that is home to many famous people and influencers.

I mean, did you all hear that Keeping up with the Kardashians is now on Hulu?! (We are not sponsored by Hulu).

While keeping up with Kourtney and Kim is obviously essential, you want us to talk about Musk and his hostile takeover bid.

Alright, alright, that’s obviously the talk of the Street; however, we like to let the numbers talk more. Before diving deeper into Musk’s hostile takeover proposal and the implications for Twitter as a company going forward, let’s look at Twitter as if none of this were happening and the market was just humming along.

Twitter’s financials

The company is currently trading at a share price of $45.08 (as of market close 4/14/2022). It’s also interesting to note that the stock currently has a short interest of 5.43%.

This means that out of Twitter’s total shareholders, nearly 5.5% are betting against the stock or short selling in some fashion. Typically, if a company has a short interest of 3% or less, there isn’t much immediate concern. However, 4% or more usually means investors should be somewhat concerned and feel the urge to perform some due diligence on the company to see if the short sellers know something they don’t.

Always do your own due diligence; this is your money we’re talking about.

Peering over to Twitter’s balance sheet, the company oversees total assets of approximately $14 billion and total liabilities of roughly $6.7 billion.

I love it when total assets comfortably outweigh total liabilities!

Yes, I am a balance sheet nerd and I hope you are too.

Pictured above is one of Twitter’s founders, Jack Dorsey.

Sidestepping over to the company’s income statement, Twitter’s total revenue has been steadily rising over a handful of years, standing at around $2.4 billion in 2017 climbing to just north of $5 billion in 2021. This steady incline in total revenue is intriguing to our team and shows that our thoughts regarding the potential future lack of popularity of the platform could be wrong. However, it is important to keep in mind that many people likely increased their social media consumption overall given the pandemic, so these numbers might not keep rising or be sustainable in the long run.

But, of course, we could be wrong, and more and more people will want to use Twitter and more importantly, buy ads.

Onto the company’s cash flow statement, their net income has been markedly volatile during the last five to six years. Specifically, the company’s net income was negative $108 million in 2017, crept up to $1.2 billion the next year, continuously swinging until landing on its most recent figure, negative $221 million.

We’re not the biggest fans of this sort of volatility!

These previous swings could be attributed to a number of factors such as increase in investments in projects within the company, stock buybacks, acquisitions, or simply losing money.

Either way, the wild ride that has been the company’s net income is far from attractive to us, especially if the company was simply bleeding money during those time periods.

Twitter’s financials continued

Moving onto more of Twitter’s financials, the company’s current share price seems objectively overvalued given that the company’s price to sales ratio is 6.90, according to TD Ameritrade’s platform. This is scary since, according to some sources, a higher price to sales ratio, such as 6.90, the more shareholders are spending in order to eke out a return on their investments.

I don’t want to work very hard to get a return on my investment(s). I want to pick, sit and let the market do its thing!

Another alarming metric is the company’s annual net profit margin. Specifically, it’s well below that of the industry, sitting at around -4% compared to the industry’s nearly 26%.

If a company that has been around for as long as Twitter has and has this much trouble carving out a profit for its shareholders, I’m going to keep my distance!

Another point of unattraction comes from the fact that Twitter does not currently pay a regular dividend to its shareholders.

Additionally, the company’s revenue growth is far below the industry as well.

Just when you thought things couldn’t get any worse, the company’s annual return on equity, assets and investment are all alarmingly below the industry.

No return, lackluster ability to make a profit.

I’m not loving this company solely based on its financials.

Now, let’s talk about some of the details and implications of the current hostile takeover unfolding in front of our eyes led by none other than Elon Musk.

Elon Musk and the future of Twitter

Elon Musk recently bid around $43 billion to buy a social media staple.

So far, the reception on Twitter’s end hasn’t been great! In fact, some employees before Musk’s bid pledged they’d leave the company if he came on as a board member.

Subsequently, he opted to not accept a board seat and went for the whole enchilada instead. I mean, the guy’s net worth is like $260 billion; the ultimate funding secured.

It is somewhat unclear as to why the tech magnate wants to buy the company; however, this move and how the potential buyout proceeds could change the corporate landscape of America forever.

If a billionaire can simply buy a company the size and scale of Twitter, why can’t other billionaires buy more companies and own them outright? Suffice it to say, it will be fascinating to see how the SEC and Twitter’s current board moves forward.

Something that is seldom discussed is Musk’s competition.

Specifically, Chicago-based private equity firm, Thoma Bravo, also seems to be on the prowl to buy Twitter. If a bidding war ensues, things will somehow become more interesting than they’ve already become.

That’s the majority of the news so far.

What does this mean for prospective shareholders and current shareholders?

For those considering buying shares of Twitter stock, tread carefully. Remember, Musk’s bid to buy the company was not your run-of-the-mill, amicable acquisition but rather, a textbook hostile takeover. Given the current general volatility in the stock market as a whole and Twitter-specific volatility in leadership and uncertainty of the company’s future strategy, buy shares with these very real risks in mind.

For those who already own shares of Twitter stock, you have interesting decisions to make. For example, you could either simply outright sell right now and protect yourself from the company-specific volatility. On the other hand, you could keep your holdings in Twitter and hope that a bidding war ensues.

Why would you want that?

Historically, the perceived value of a company increases when hedge fund managers, private equity firms or other affluent financial gurus (or Elon Musk) have a deep desire to buy a large stake in a company. If Thoma Bravo or other firms prepare bids that would potentially top Musk’s, the share price of Twitter will likely increase substantially because the more people want to own Twitter, the higher the price will have to be paid by the ultimate victor.

Supply and demand; there’s only one Twitter but a lot of demand for the blue bird, it’s intellectual property and vast amounts of data.

Should you buy Twitter stock?

The volatility is high and the fundamentals aren’t impressive.

If the current Musk, Thoma Bravo and board of directors situation wasn’t happening, we’d unequivocally give the company a “sell” rating.

However, if you’re financially prepared for a potentially turbulent and uncertain ride going forward, buying shares in order to capture some short-term gains from the company’s stock price movement might be right for you.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.