Twitter (TWTR) has played the role of the media's best friend recently. Elon Musk, the Tesla (TSLA 0.49%) CEO, bought a 9.2% stake in the company in early April, prompting Twitter's share price to rally more than 20% at one point. Musk has been a longtime critic of the popular social media company and routinely argues that the platform doesn't appropriately enable free speech.
Although a stake of less than 10% is passive in the eyes of Wall Street, many investors are convinced that Musk plans to transform the way Twitter operates its business. The fresh news has brought forth many rumors about the company's future plans. Let's examine what lies ahead for Twitter and what that may indicate for shareholders today.
Elon Musk has threatened to create his own social media platform in the past, but let's face it, it wouldn't be easy to build a competing company from scratch. It would be wiser to become a major shareholder of a current market leader, which is exactly what Musk chose to do. But of course, he had to take it one step further -- the prominent CEO offered to buy Twitter in its entirety for $43 billion just days after becoming the company's largest shareholder. The bid valued Twitter at $54.20 a share, a 54% premium over the company's market value prior to Musk's initial investment. This past Friday, Twitter adopted the "poison pill" strategy against Musk, which forbids him from raising his stake in the company beyond 15% over one year.
Noise surrounding Musk's desire to take Twitter private has attracted the attention of several other investors. Thoma Bravo, a leading technology-focused private equity firm, allegedly reached out to the social media company following Musk's offer to discuss a potential deal. Apollo Global Management (APO 1.42%) has also expressed interest in doing business with Musk and other bidders involving Twitter. In a situation like this, it's not always easy to distinguish the real news from the fake. Although it would be a drawn-out process, it's not unreasonable to believe that Twitter is a potential private equity candidate moving forward.
How's the share price moving?
Twitter's share price has certainly benefited from the headlines. The company's stock has soared 29% in the past month compared to the S&P 500, which has declined 2% over the same time period. Twitter shares responded particularly well to the company's decision to deploy the poison pill, triggering the stock to end the day 7% higher on April 18.
Even after the nice increase, shares of the social media company are still trading below its historical valuation. Twitter pegs a price-to-sales multiple of 7.3 as it stands today, as opposed to the company's five-year average of 8.4. It'll be interesting to see how the stock price moves if and when the ongoing noise fades away. Still, investors should know that Twitter shares are reasonably priced at current trading levels.
What should investors do?
I personally don't recommend buying Twitter until we learn more about the company's current situation. Going private would be a lengthy process, but I'm not ruling it out as a potential opportunity for the social media firm moving forward. It's clear that many investors have a problem with the current state of Twitter's operations, so perhaps going private could serve the company well over the long run. Regardless, this is a situation that we'll have to let unfold. Grab your popcorn -- who knows what's coming next?