- As Twitter enters a messy court battle with Musk, business conditions are also becoming challenging
- Twitter growth targets look unattainable as companies scale back digital ad spending in anticipation of a recession
- Twitter stock now trades 36% below Musk’s offer price
There seems to be no good outcome for investors in Twitter (NYSE:TWTR) after billionaire Elon Musk announced the withdrawal of his $44-billion deal to buy the struggling social media giant and take it private.
Musk, the world’s richest man and Tesla (NASDAQ:TSLA) CEO, told Twitter’s board in a regulatory filing late Friday that he is pulling out of the deal he signed six months ago, alleging that the company misrepresented user data and committed a material breach of the agreement.
His exit marks a dramatic turn in his pursuit of restructuring Twitter and turning the platform into a place where free speech will thrive. As he put together a comprehensive financing plan, Musk continued to accuse the company of misleading the public about the number of automated accounts known as spam bots on its platform.
Twitter Chairman Bret Taylor said the company will pursue legal action in order to close the transaction “on the price and terms agreed by Mr. Musk.” The company has denied Musk’s claims, saying bots are less than 5% of total users, with executives insisting as recently as last Thursday that their estimates are accurate.
Though it’s hard to predict the outcome of a complicated court battle, it’s clear that Twitter stock will likely remain in a deep slump for the foreseeable future, hit by uncertainty and worsening business conditions.
Twitter stock was trading about 8.5% lower on Monday, and almost 38% below the $54.20-per-share offer Musk made in April. Its shares are also trading below where they were in early April before Musk took a surprise 9% stake in the company, which officially kicked off his takeover attempt.
Source: Investing.com
Unattainable Goals
Despite its status as a global communications platform, Twitter failed to unlock its true value. While the San Francisco-based micro-blogging firm posted its first real yearly profit in 2018, its shares continued to underperform as the company struggled to devise a clear path to take advantage of its massive global reach.
Pressured by activist investor Elliott Management Corp., Twitter is aiming to double its revenue to $7.5 billion by the end of 2023, and reach at least 315 million so-called monetizable daily active users by that time.
These targets are now becoming unattainable as companies scale down their digital ad spending in anticipation of a recession. Twitter makes 90% of its revenue from digital ads. Due to these challenges, the majority of Wall Street analysts in an Investing.com poll assign a neutral rating on Twitter stock as they don’t see a clear path for the company going forward.
Source: Investing.com
According to Debra Aho Williamson, a principal analyst at Insider Intelligence in a Bloomberg report:
“If Musk is able to terminate the deal, Twitter will still be left with the same problems it had before he came on the scene. Its user growth is slowing. And while ad revenue is still growing marginally, Twitter is now dealing with a slowing economy that could squeeze ad spending on all social platforms.”
Musk’s intention to buy the company and then dragging his feet have also demoralized Twitter employees, who, according to media reports, are raising questions about what is next for the company. Twitter has been in a hiring freeze since May and laid off 30% of its talent acquisition team last week.
Bottom Line
Musk’s announcement to scrap his agreement to buy Twitter leaves the micro-blogging site in uncharted territory, further complicating its turnaround plans. That uncertainty will continue to keep its stock under pressure.
Disclosure: The writer doesn’t own shares of Twitter.