This past week, news broke that serial entrepreneur and world's richest person Elon Musk took a substantial stake in Twitter (TWTR). A 9.2% stake, to be exact. Which, as of this writing, is worth $3.4 billion -- a fraction of Mr. Musk's sprawling empire. It also quickly yielded him a seat on Twitter's board of directors.
Musk has millions of followers and fans, and his success in taking Tesla from idea to auto industry revolutionary is the primary source of his wealth. The money question is thus: Should you follow Musk's lead and buy Twitter stock too? Five Fool.com contributors weigh in.
Image source: Getty Images.
Can a few tweet tweaks make Twitter soar like an eagle?
Nicholas Rossolillo (Buying Twitter, cautiously): Twitter has been a financial wreck for years. That's in spite of itself. The social media platform is a fantastic source of live news, used by millions around the globe as a source for idea sharing and collaboration.
And yet, the sad reality is that Twitter has been a cash incinerator for years. In the brief span of time it was free cash flow positive, the margins were great. It's proof of what Twitter is capable of as a business. But media, especially of the social media variety, is typically a stable cash-generating supercharger.
Data by YCharts.
Enter Elon Musk, in true controversial fashion. If there's anyone out there who knows how to effectively affect an army of followers, it's him. (Tesla dissolved its PR department years ago and essentially does zero paid advertising, though Tesla's success in spite of that might have to do with the product as much as it does with Musk's promotional activity on Twitter.) To be clear, Musk's early "suggestions" on improving the tweeting experience are vague. Save for adding an edit button, which is quite specific, but not exactly a big-dollar move for the stock. No, Twitter needs classic internet business metric improvement (more audience engagement) or more fundamental change at the business model level (a subscription model, for example, has been talked about for some time).
Nevertheless, I have to believe that Musk's stake in Twitter is about the money as much as it may be for his own personal benefit. After all, while a few billion spent on Twitter stock is only a drop in the bucket for the Musk empire (about 1.4% based on an estimated $270 billion net worth), that 9.2% stake in the social media company could become quite substantial if some changes help Twitter live up to its financial expectations. I'm curious to see how this experiment plays out. I'll throw a little "play money" at it, likely next week, and see how it goes from there.
Elon gets the benefit of the doubt, but not my money (yet)
Jason Hall (Prove it): I have a bit of a blind spot for Elon Musk. Or that is to say, I go back and forth over whether I think his abilities as a visionary, or his knack for getting distracted and causing a furor, is more important. When it's the former in control, Musk almost always has proven worth investing along with. If it's the latter, there's the risk of leaving devastation in his wake.
About Twitter. I think there's an argument that it's one of the most important media platforms in history. Its use to share information quickly is unmatched, and hundreds of millions of people around the world rely on it for news and information. But as a business, it's been a terrible performer. Its asset-light platform should be a cash cow. It hasn't come close:
TWTR Return on Invested Capital data by YCharts
In the chart above I have compared it to Meta Platforms, which is the gold standard for social media monetization. The point isn't to give it an unfair comparison to the best moneymaker in social media, though. It's to emphasize that after this many years, Twitter just hasn't been a good business.
Without getting bogged down in projecting Musk's motivations here, I do think Twitter needs serious disruption at the very top. Boy howdy, will Musk bring that. We don't know yet if it's going to be good or bad disruption. I'm willing to give Musk the benefit of the doubt here, but I'm not giving Twitter any money, at least not yet.
A famous investor makes headlines, but it doesn't fix Twitter's big problem
Toby Bordelon (Not buying): No. Nothing against Elon Musk here, but Twitter's stock is basically flat since its IPO and I'm not convinced that Musk's involvement does anything to change that. He has less than 10% and one board seat, so there's influence but he isn't calling the shots.
Data by YCharts.
Twitter's problem, if you are an investor, is monetization. How does the company turn its user base into cash flow? It really hasn't been able to solve that problem. While Musk's involvement might be good from a PR perspective, the ideas he has been talking about on Twitter are really about improving or changing the user experience, not about generating revenue. So sure, Musk as a power user probably does have some good ideas about improving the platform. But will those ideas translate into more revenue and cash for the company? I'm skeptical.
If I were already a Twitter shareholder, I might be cautiously optimistic here. It's not like anything else management has done over the past few years has resulted in fantastic shareholder returns, so sure, let's see what Musk brings to the table. It's possible, though unlikely, this is what Twitter needs to finally be a good business for shareholders. But I'm not a buyer on this news.
Musk gives Twitter more of what it has, nothing it needs
Lou Whiteman (Sell): Twitter has been a massive success as a cultural phenomenon, with more than 300 million monthly active users. But its track record as a business is decidedly less impressive. Twitter shares are basically unchanged since the company's September 2013 initial public offering, trailing the S&P 500 by more than 150 percentage points.
This is a business in desperate need of an activist who can dive in, roll up their sleeves, and help Twitter rethink how to monetize its massive user base more in line with the success Meta Platforms has enjoyed with Facebook and Instagram. But of all the potential activists out there to get involved with Twitter, Musk is a poor fit.
For one, Musk is already busy traveling the globe running both Tesla and his privately held space company SpaceX, not to mention smaller ventures including The Boring Company tunneling operation. And Musk's resume suggests he is at his best when left to the big picture, visionary parts of the business, not day-to-day operations. Tesla has a well-deserved reputation for failing to launch products on time, and has continuously run into snafus as it tries to scale up manufacturing.
Musk is, of course, a high-profile user of Twitter. His presence on the board could help attract additional eyeballs to the platform, and potentially keep users more engaged than they would be otherwise. But again, engagement has never been Twitter's issue. The question for shareholders has always been what Twitter can do to maximize the value of those users, and Musk would appear to neither have the time nor the expertise to fully explore the answer to that question.
It's ironic that the Silicon Valley business most desperately in need of an activist shakeup ended up with an activist who is unlikely to address the parts of the business that need to be shaken. But Twitter has always been a platform fueled by irony. Long-suffering Twitter shareholders should not count on their new celebrity director to provide a sustained boost to the business, or the stock.
Buying Twitter is crazy and I'm in
Travis Hoium (Buy): It's hard to think of a company that has more cultural relevance than Twitter. But that relevance was combined with incredibly disappointing results and a stagnant stock price, until Musk's big purchases.
As Musk takes a bigger role at Twitter, the question is: Can cultural relevance alone make Twitter a great investment? In 2022, I'm inclined to think it can.
Musk's stake in Twitter likely values the company more on its cultural relevance than on its finances -- valuing its memes over cash flow investing, if you will. But this isn't a new philosophy, and the same relevance first, finances later strategy has worked for Tesla and more recently GameStop and AMC. In a lot of ways, I think it's more believable that Twitter can grow into its current valuation more easily than Tesla, GameStop, or AMC.
Twitter is a leader in cultural relevance and has a lot of optionality to turn that into financial success. Ads, subscriptions, NFTs, cryptocurrencies, and community chat are just a few monetization options for the company. Until Twitter figures out how to make money, Musk increases the company's relevance in the zeitgeist and that's enough to make it a buy today. This call isn't without risk, but what I've learned over the last decade is that leading with the financials argument is often a losing one when what matters is attention. Twitter is winning that battle, and that's enough to make it a great stock.
