Few stocks have been in the headlines more in the past couple of weeks than Twitter (TWTR). It all started on March 25 when frequent Twitter user and world's richest man Elon Musk, the CEO of Tesla and SpaceX, asked his followers if Twitter was "rigorously adhering" to "free speech" on the platform. After more than 2 million votes where 70% said "no," Musk took action and purchased a chunk of the company.
After Musk took a 9.2% stake in Twitter (which made him the single-largest shareholder), the stock shot up more than 27% on April 4. Twitter CEO Parag Agrawal then offered Musk a board seat, with the caveat that he could own a maximum of 14.9% of the company. Musk rejected the board seat but then offered to purchase the company for $54.20 per share and take it private.
In response, Twitter's board of directors used what is known as a "poison pill," where other shareholders are offered discounted shares of the company if any person obtains more than 15% of the outstanding shares without the board's approval. This action dilutes existing shareholders but prevents the company from getting bought out. So while investors wait to see what happens next in the Twitter saga, a simple question arises: "buy, sell, or hold Twitter stock?"
Why investors should buy
With the stock trading around $48 per share, Musk's buyout price of $54.20 only implies a 13% upside. This difference seems like a relatively high-risk low-reward scenario in the unlikely event the board changes its mind and accepts the buyout.
From a financial view, Twitter had a reasonably successful 2021, with annual revenue reaching $5.1 billion -- a 37% year over year increase. However, Twitter posted an operating loss of $493 million for the whole year. If not for a one-time $766 million litigation charge, this number would have been positive. The monetizable daily active users (mDAU) trend was also positive for the fourth quarter.
|Monetizable Daily Active Users|
|Q4 2021||Q3 2021||Q4 2020|
|217 Million||211 Million||192 Million|
With rising mDAUs, positive revenue trends, and the potential to break even during 2022, Twitter's business seems to be heading in the right direction.
Why investors should sell
Before Musk revealed his stake in Twitter, the stock was around $39. With a quick 25% pop on news of a potential buyout, investors may be wise to take the money and run. However, if you purchased the stock in January 2021 at more than $75, you're still sitting on hefty losses.
Additionally, your Twitter stake may become diluted if the poison pill gets used. If you aren't offered any of the discounted shares, your shares may lose significant value because of dilution. This risk seems like too big of a chance to take, in my opinion.
Finally, Twitter's board of directors has come under heavy criticism over its makeup. One member, Robert Zoellick, has never tweeted. How can someone be trusted to guide the company when he doesn't even use the product? Musk also criticized the board members for owning relatively little stock in Twitter. If the board members don't have a significant financial stake in Twitter, what incentives do they have for the company to do well?
The cherry on top of the sell case is former CEO and Twitter co-founder Jack Dorsey calling the board "dysfunctional." There has been a struggle in this company for some time; internal business turmoil doesn't bode well for stocks.
Why investors should hold
Elon Musk may be trying to get another bidder to go in with him on the stock, which may increase the buyout price further. If this happens, the stock will rise to match this new offer. There could also be another buyout offer from a different entity -- rumored to be private equity firm Thoma Bravo -- that tops Musk's proposal.
These scenarios are possible, and Musk has eluded to a "plan B" if his initial offer is rejected, but investors won't know for sure until that plan is laid out.
You may also want to hold shares if you believe in Twitter's chances as a public company over the long run. If a buyout happens, you'll get the full price. If not, you'll have an opportunity to watch your investment thesis unfold (or crumble).
This chapter in the book of Elon Musk has been a fascinating one, but I have a feeling he's not yet done with Twitter. I'm not a shareholder, but I'd be selling if I were. With relatively little confidence in the board of directors and the former CEO and co-founder Jack Dorsey echoing those sentiments, it doesn't bode well for the leadership. Weak leadership has never been a good sign for any stock, and Twitter is no exception.