Elon Musk's plan to acquire his favorite media outlet, Twitter (TWTR), has a lot of investors scratching their heads. The aging social media business is underperforming nearly all of its peers, but plenty of investors think Musk can begin an exciting new chapter for the troubled company.
Shares of Twitter had been languishing for months, but the stock quickly rose after Musk disclosed a 9% stake in the company, making him its largest shareholder. Instead of accepting Twitter's offer to join its board of directors, Musk put in a modest bid with a slight premium in an attempt to take the entire company private.
If you want to buy Twitter now because you think Musk can boost its performance, here's why you could end up disappointed.
What is Musk's motivation?
With a few tweets that cost nothing, Musk can drum up more buzz for a new Tesla vehicle than Ford can muster with $100 million worth of television ads. That's great for Musk, but it also means his motivations for acquiring Twitter are probably more aligned with the interests of Tesla's shareholders than Twitter's.
Image source: Getty Images.
Twitter's board of directors doesn't want to find out about Musk's ideas for the social media property. Twitter quickly countered Musk's offer with a "poison pill" that will flood the market with new Twitter shares and heavily dilute the value of existing shares if Musk raises his ownership stake past 15% of the company.
Twitter's chronic underperformance
Musk's motivations should be concerning to any Twitter investor, but it isn't the most important reason to avoid the stock right now. A declining pace of growth in a heavily competitive industry that it helped launch over 16 years ago is the most important reason to stay away from this stock for now.
Data source: Twitter, Snap, and Meta Platforms. Chart by author.
Twitter's user base is still growing faster than Facebook, a Meta Platforms company, but not nearly as fast as Snap, which is growing faster now than it did at the beginning of the pandemic. Unfortunately, Snap isn't the only competitor eating Twitter's lunch right now.
TikTok's parent company, ByteDance, is privately held, so it doesn't need to share daily active user numbers or any other figures with the public. Earlier this year, some ByteDance insiders couldn't help themselves and told Reuters that revenue in 2021 soared 75% year over year to a whopping $58 billion. That's around $53 billion more revenue than Twitter reported last year.
TWTR Net Income (TTM) data by YCharts
Twitter's relatively slow growth rate wouldn't be such a problem if the company was making money, but it isn't. Twitter's bottom line crossed into positive territory in early 2018, but it's been bleeding money since the beginning of the pandemic.
In 2021, Twitter's operations lost $492 million. When the company announced fourth-quarter earnings this February, it told investors to expect another operating loss between $225 million and $175 million during the first three months of 2022. If the company can't right this ship soon, the gains that Musk's antics gave its stock price could soon evaporate.
