Elon Musk becomes Twitter’s largest shareholder. Is a shake-up coming?

TL;DR

• Elon Musk has become one of the largest shareholders of Twitter after he took up a 9.2% stake in the social media company.
• Just last week, Musk had suggested that he is considering building a new social media platform as free speech is essential to a functioning democracy.
• Musk and Twitter’s previous CEO Jack Dorsey have had active exchanges on the platform, often in support of cryptocurrencies. In 2020, Musk had suggested that Twitter should be able to tell real and fake users apart.
• Twitter has ambitious targets to grow revenue by close to 50% to $7.5 billion in 2023. If it is able to do so, it would be trading at about 5x its forward revenue.

What happened?

Elon Musk has become one of the largest shareholders of Twitter after he took up a 9.2% stake in the social media company. The surprise move by Musk was revealed in a filing with the Securities and Exchange Commission.

Musk’s stake is estimated to be worth US$2.89bn based on Twitter’s closing price on 1 April. It would also significantly exceed that of Twitter founder Jack Dorsey, who has a 2.25% stake in the company.

Twitter’s share price soared in the pre-market following the announcement, as investors speculated that Musk would be able to work his magic with the social media platform he has been active voicing his thoughts on.

Thinking of investing in Twitter? Here are 3 things you need to know before diving in!

3 things to know about Twitter

1. Musk is considering building a new social media platform

Just a week ago, Musk had asked his more than 80 million followers on Twitter if they thought the platform encouraged free speech. In his view “Free speech is essential to a functioning democracy.” After which he questioned “Do you believe Twitter rigorously adheres to this principle?”

When asked if he would consider building a new social media platform, Musk then answered that he is giving serious thought to this. Interestingly, this exchange took place on 27 March, close to two weeks after he had purchased 73,486,938 Twitter shares on 14 March.

2. Jack Dorsey resigned as CEO in November

Twitter’s co-founder Jack Dorsey had stepped down as the CEO of Twitter in November last year, handing over the role to Twitter’s chief technology officer Parag Agrawal.

Dorsey did not provide any reason for his resignation apart from saying that he believes the “company is ready to move on from its founders”. Many believed that his departure was due to questions raised about him also running Square, the digital payments company.

Interestingly, Musk and Dorsey are both seen as crypto influencers who have used Twitter to show their support for the digital currency. Musk had also shown his support for Dorsey when an activist shareholder tried to remove Dorsey from his leadership role at Twitter.

While Musk has not announced his plans from building such a significant stake in Twitter, he had offered ideas in the past on how the platform can be improved.

In January 2020, Dorsey had asked Musk in a video call in front of employees for “direct feedback”. Musk suggested it would be helpful to be able to tell fake and real users apart by asking “Is this a real person, or is this a bot net, or a sort of troll army, or something like that?”

3. Twitter has ambitious plans to grow its users and revenue

While Twitter’s social media peer Meta (formerly Facebook) was facing a tough time in the previous quarter, Twitter appears to see some signs of improvement in its user base after a period of stagnation.

• Twitter’s revenue in grew 22% YoY to $1.57 billion in 4Q21, driven by an increase in active users and higher ad revenue. Monetisable daily active users (mDAUs) rose by 13% YoY to 217 million.
• Twitter management expects mDAU growth to accelerate in the U.S. and international markets this year. This is driven by the work it has done to help people successfully create new accounts and reactivate existing accounts.
• Notably, Twitter saw more than 25% YoY increase in the number of people who come to Twitter every day to either create a new account or reactivate an existing account.
• Twitter has re-affirmed its goal of hitting $7.5 billion in revenue (+48% vs FY21) and 315 million in mDAUs (+45% vs current) by the end of FY23.

What would Beansprout do?

The 20% move up in Twitter’s share price following the announcement would see the stock trading at about 5.0x forward revenue. Twitter’s board has also recently approved a $4 bn share repurchase programme, of which $2 bn could be deployed in “accelerated” buying programme to allow Twitter to take immediate advantage of any share price weakness.

While we can get some clues on what Musk might be thinking of in amassing the stake, it remains to be seen what he would be able to do to build a truly different social media platform.

Wondering how does Twitter stack up against Meta? Read our article Is Meta a buy?

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