Twitter's (TWTR) stock price surged 27% on April 4 after Tesla CEO Elon Musk revealed he had bought a 9.2% stake in the social media company for about $2.9 billion. Musk's investment dwarfs co-founder Jack Dorsey's 2.25% stake and makes him Twitter's largest single or institutional investor. Twitter appointed him to its board of directors the following day.
Musk made his investment after asking his 80.8 million Twitter followers if the platform "rigorously adheres" to the principle of free speech. Over 70% of the poll's 2.04 million respondents said Twitter didn't follow that principle.
Musk's poll and subsequent investment foreshadow a potential clash with Twitter's CEO Parag Agrawal, the former chief technology officer who succeeded Jack Dorsey after his abrupt resignation last November.
Whereas Dorsey had often promoted Twitter as a platform for free speech, Agrawal previously told MIT Technology Review that the company's role was "not to be bound by the First Amendment."
So is it too late for investors to buy shares of Twitter after Musk's massive purchase? Or could Musk finally shake things up at Twitter and enable the stock to generate better returns for its long-term investors?
Twitter's biggest problems
Twitter went public at $26 per share on Nov. 7, 2013. Its shares started trading at $45.10, and eventually hit an all-time high of $77.63 last March. But today, the stock only trades at about $50.
Twitter ultimately failed to outperform the S&P 500, which has advanced more than 150% since the company's public debut, for three main reasons.
First, Twitter's user growth decelerated. It initially aimed to reach 400 million monthly active users (MAUs) by the end of 2013, but it broadly missed that target. It eventually replaced its MAUs with monetizable daily active users (mDAUs) to filter out its spam, bot, and inactive accounts.
Twitter ended 2021 with 217 million mDAUs, which represented 13% growth from a year earlier. It believes it can hit 315 million mDAUs by the end of 2023, but that's a lofty goal that will require its year-over-year mDAU growth to accelerate above 20% again over the next two years.
Second, Twitter's domestic growth stalled out. Its mDAUs in the U.S. rose just 3% year over year and stayed flat sequentially at 38 million in its latest quarter. It offset that slowdown with the growth of its international mDAUs -- which grew 15% year over year and 3% sequentially to 179 million -- but it still generates over half its revenue from its higher-value mDAUs in the U.S.
Therefore, Twitter's controversies in the U.S., which include its bans on former President Donald Trump and other controversial public figures, will still significantly impact its growth despite only accounting for 18% of its mDAUs.
Lastly, Twitter plans to ramp up its spending this year to expand its ecosystem. However, Twitter's previous product launches under Dorsey -- including its short-lived "Fleets," organized topics for tweets, new tipping features, and Twitter Blue subscriptions for top accounts -- haven't moved the needle yet. Agrawal is gradually expanding Twitter as a "social shopping" platform, but that strategy could also expose it to fierce competition from Pinterest (PINS 2.04%) and Meta Platform's (META -1.23%) Instagram.
Will Musk help or harm Twitter?
Shortly after disclosing his stake in Twitter, Musk asked his followers if they wanted the ability to edit their tweets. Nearly three-quarters of the poll's 4.4 million respondents said "yes," and Twitter subsequently said it had been developing an edit feature for its Twitter Blue users "since last year."
That change seems minor, but it strongly suggests that Musk will continue to poll his followers for more decisions regarding Twitter's future. As of this writing, Musk's followers are already asking for the reinstatement of Donald Trump's account and the elimination of its censorship rules.
Prior to making his investment, Musk said that as a "de facto town square," Twitter "fundamentally undermines democracy" by "failing to adhere to free speech principles." That statement sets up an imminent confrontation between Musk and Agrawal, who accelerated Twitter's permanent bans on controversial accounts after taking the helm.
Removing those censorship rules might widen Twitter's moat against conservative-oriented challengers like Digital World Acquisition Corp.'s (DWAC 0.49%) Trump-backed Truth Social or Parler, but it could also make it a much bigger target for government regulators.
Furthermore, Twitter itself could still be "de-platformed" by Apple and Alphabet's Google -- which hold a near-duopoly in mobile app stores -- if the platform devolves into a sewer of fake news, misinformation, and hate speech.
Simply put, handing over Twitter's keys to Elon Musk and his followers could be a very risky move for the company. So unless Twitter's other board members can keep Musk in check, there's a real risk the platform could run off the rails and alienate its users, advertisers, and investors.
Musk's investment makes things worse
Dorsey and Agrawal understood that running Twitter as a sustainable business required a delicate balance between free speech and self-censorship, just as traditional media platforms like TV and radio have always done. Musk's investment could disrupt that balancing act and throttle its growth.
Therefore, I think it's too late to buy Twitter's stock right now. Musk's investment briefly boosted the stock, but those returns could fade as the market processes the long-term implications and potential headaches.