Twitter's (TWTR) stock recently went on a roller-coaster ride after Elon Musk -- who previously took a 9.2% stake in the social media company -- offered to buy all of its remaining shares for $54.20 apiece in a $43 billion deal. It's unclear if Musk is actually serious about buying Twitter, but its stock had delivered unimpressive growth for years before his abrupt bid.
Twitter went public on Nov. 7, 2013, at $26 per share and opened with a 74% gain at $45.10. But as of this writing, it still only trades in the high $40s.
Investors who bought some IPO shares could have turned a $1,000 investment into about $1,800 today, but the same amount invested in an S&P 500 index fund during the same period would be worth roughly $2,500 now.
Twitter has also generated much weaker post-IPO returns than other social media giants like Meta Platforms (META -0.34%) and Snap (SNAP 1.23%). Let's review the main reasons Twitter's stock failed to take off, and if the recent drama with Elon Musk will make it a more compelling investment.
Twitter user growth is unimpressive
Twitter served 241 million monthly active users (MAUs) back in 2013. That represented 30% growth from a year earlier, but it completely missed then-CEO Dick Costolo's target of 400 million MAUs. Its MAUs grew 20% to 288 million in 2014, then rose 11% to 320 million at the end of 2015.
That slowdown indicated Twitter would probably never reach 400 million MAUs, and Costolo resigned n mid-2015. Founder and early CEO Jack Dorsey returned to succeed Costolo, but Twitter still struggled to gain new users. Its MAUs dipped to 319 million in 2016, rose to 330 million in 2017, but fell to 321 million in 2018.
In 2019, Twitter stopped disclosing its MAUs altogether and rolled out a new metric: monetizable daily active users (mDAUs). It claimed that mDAUs filtered out the spam, bot, and inactive accounts which made it difficult for advertisers and investors to gauge its true engagement rates.
But that change also revealed just how tiny Twitter was. Twitter ended 2019 with 152 million mDAUs. That figure rose 27% to 192 million in 2020 and grew another 13% to 217 million in 2021, but it's still a lot smaller than Snapchat, which ended last year with 319 million DAUs.
Last February, Twitter predicted it could reach 315 million mDAUs by the end of 2023, which implies it would grow its mDAUs by more than 20% over the next two years. It also declared it could more than double its annual revenue from $3.7 billion in 2020 to over $7.5 billion in 2023. But just nine months later, Dorsey abruptly resigned and handed the reins to his CTO Parag Agrawal.
Dorsey's departure is understandable, since he also serves as the CEO of Block, but it also cast some doubts on Twitter's ability to hit its ambitious growth targets for 2023.
Twitter has scattershot strategies
Under Dorsey, Twitter increased its headcount and launched new features to boost its engagement rates. But very few of those new features -- which included its short-lived "Fleets," organized "topics," new tipping tools, and "Twitter Blue" subscriptions for top accounts -- made lasting impressions.
Meanwhile, it failed to address users' constant requests for longer tweets, an edit button, and tougher anti-harassment measures. Some critics slammed the platform for spreading fake news and hate speech, while others accused it of violating free speech standards by banning controversial users and implementing double standards for conservative and liberal users.
Instead of resolving those pressing issues, Agrawal plans to expand Twitter as an e-commerce platform with shoppable tweets and integrated payment features. That strategy could complement its core advertising business, but it could struggle to catch up to Pinterest and Meta's Instagram in the nascent "social shopping" market.
Nonetheless, Twitter still intends to increase its headcount by another 20% this year to pursue those goals. That mix of higher spending, overly ambitious growth targets, and scattershot plans for the future have all weighed down Twitter's stock.
Elon Musk could cause more headaches
Dorsey's decision to ban President Trump after the Capitol riot in January 2021 was arguably his boldest and most controversial move as Twitter's CEO. But Agrawal now faces an even more troublesome opponent in Elon Musk.
Musk, a vocal critic of Twitter's censorship policies, was initially appointed to its board of directors upon disclosing his initial stake in early April. But he subsequently turned down the offer, publicly mocked the company in a series of now-deleted tweets, and launched a full buyout offer.
I think it's doubtful that Twitter's board will accept Musk's "best and final" offer, since the stock was trading at about $70 just a year ago. Musk's position on toning down Twitter's censorship policies also contradicts Agrawal's argument that the platform isn't "bound by the First Amendment."
That potential clash makes Twitter stock, which already isn't cheap at about 50 times forward earnings, an even less appealing investment. Therefore, I predict that Musk will eventually walk away, sell his stake, and Twitter will go right back to where it was before the buyout drama started.
Twitter still faces a lot of challenges
Twitter has generated disappointing returns because it's ultimately a niche platform. It's widely used by media outlets, public figures, and brands, but it still hasn't established itself as a mainstream platform like Facebook or Instagram yet. Unless it can break out of that shell, it will likely continue to underperform the market and most of its social media peers.