Why I’m Not Touching This Social Media Stock With A 10ft Pole

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The drama continues between Twitter (NYSE: TWTR) and Elon Musk about the takeover deal the billionaire is trying to walk away from. The social media company is suing Musk in an attempt to force him to complete the acquisition at the originally agreed price of $54.20 per share, a deal that would value it at $44 billion.

Now, however, the stock has fallen into the $30s and is trading around 28% below Musk’s offer price. That discrepancy could tempt some investors with the promise of a net profit if litigation forces Musk to make the purchase. However, there are three big reasons why I avoid stock altogether.

1. Uncertainty around Twitter’s user base

The size of Twitter’s user base is at the center of the disagreement between the parties. Musk says he’s trying to bail out the buyout because Twitter allegedly misled him about the number of bots and spam accounts counted in Twitter’s monetizable user base. Specifically, Musk disputes Twitter’s estimates that spam accounts make up less than 5% of its 237.8 million monetizable daily active users (mDAUs).

Recently, Twitter’s former security chief came forward as a whistleblower with serious charges. Among them, he claimed that Twitter had serious cybersecurity vulnerabilities, that management had misled the company’s board of directors about these challenges, and that Twitter could not accurately track bots and accounts. of spam on its platform.

These are still only allegations. During the course of the litigation, it is likely that more precise data will be produced which will show where things stand. However, Twitter, like most social media platforms, relies on ad revenue to make money. At best, there is still a lot of uncertainty about the number of monetizable Twitter users, which is undoubtedly a drag on companies spending their marketing dollars on digital platforms.

2. Lack of profitability

The lack of clarity about its user base is not helping Twitter’s finances. The company has grown to generate over $5 billion in annual revenue, but is currently unprofitable on a net income basis and has negative free cash flow:

TWTR Free Cash Flow Data by YCharts

Rival Metaplatforms does not have this problem – advertising is very lucrative for the Facebook parent. So the question is whether Twitter can become better, earn more money per click on its ads. If not, can it create successful additional revenue streams? Twitter has taken a few turns on this, including Twitter Blue and Super Follows, but those haven’t made a big difference yet.

Giving Twitter the benefit of the doubt is difficult because no one has seen the improvement yet. Its ad-supported model was not enough to bring the company to consistent profitability. Until and unless that changes, the stock’s long-term upside may be limited.

3. Can you trust management?

Twitter will remain a public company if Musk succeeds in aborting its acquisition. Investors who own stocks should be comfortable with the current management team. Twitter is no longer run by its founder; Jack Dorsey resigned as CEO last year to run To block full time.

Current management team agreed to sell to Musk at $54.20 per share in April; the stock was trading in the high $30s at the time. Accepting an acquisition happens, and it doesn’t necessarily make anyone look bad. However, what does this tell long-term investors now that the deal could fall through?

Management was willing to cash in at this level, so does management believe Twitter’s business can create long-term value that exceeds the buyout price? That’s a little harder to believe, given that the executives were willing to sell the company at that price. Shareholders should look for management teams that are all in – leaders who want to take a company from Level 10 to Level 100. While no one can say that Twitter management doesn’t operate with that mindset, it may be fair to wonder how motivational they are.

In the end, the acquisition will happen or not. Investors buying Twitter now should be comfortable with the possibility of owning the stock without an imminent buyout. Given the uncertainties surrounding critical areas of the business such as its user base, finances, and management team, it’s hard to get to grips with this scenario at this time.

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Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds posts and endorses Block, Inc., Meta Platforms, Inc., and Twitter. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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