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Is Elon Musk undervaluing Twitter in his unsolicited bid?

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Image Credits: Bryce Durbin / TechCrunch

Good morning from the West Coast! Today is TechCrunch: Early Stage, which means that I should be doing last-minute prep for my sessions. But instead, we’re going to talk about Elon Musk, who made an unsolicited bid for Twitter that is naturally taking the technology and business media by storm.

Our own Romain Dillet has TechCrunch’s first notes on the matter if you want a newsy overview. Twitter has responded, I should note, by saying that it will examine the offer.

What I want to know, and somewhat quickly, is whether the price being offered makes any damn sense. So let’s find out. We’ll need to know how quickly Twitter is growing, the strength of its user base expansion and how it has recently traded. We’ll also factor in Twitter’s current efforts to bolster shareholder value.

Musk is offering $54.20 per share for 100% of Twitter, a deal worth $43.4 billion. Too low? Let’s find out.

How is Twitter doing?

It might surprise you, but pretty well.

In 2021, Twitter generated $5.08 billion in total revenue, up 37% from the year-ago period, per its Q4 2021 earnings. Twitter’s main business, advertising, grew 40% last year. Those figures are hardly those of a social network struggling to find its customer base.

But what about users? How is Twitter doing when it comes to actually getting folks to use its service? In the fourth quarter of 2021, Twitter reported that its Monetizable Daily Active User (mDAU) cohort grew 13% to 217 million. Is that rapid growth? Nope, but Twitter is not a young service and having north of 200 million daily active users that you can run ads against is a huge base, and so long as the growth figure stays above 10%, it’s probably in fine shape.

From a very basic perspective, Twitter saw its revenues grow quickly last year, and its user base continued to expand. So far, not a company in distress. If we look ahead, does that change? Are the company’s forward numbers a mess?

Not really. In 2022 Twitter expects:

[F]ull-year revenue to grow in the low to mid 20% range vs. 2021 (excluding MoPub and MoPub Acquire), with performance ad revenue growing faster than brand, and mDAU growth accelerating in the US and International markets over the course of the year — all driven by investments initiated in 2021.

The above means that Twitter will end the year with revenues of more than $6 billion — 20% of $5 billion is $1 billion, and 25% of $5.08 billion is $1.27 billion — and an even greater base of active, monetizable users. Again, I am struggling to find the crisis that Twitter shareholders would need to feel to warrant selling the company to Musk.

Before we get into the valuation side of things, Twitter’s Q4 2021 earnings included a bear hug to investors, with the company announcing a new “$4 billion share repurchase authorization,” half of which was marked as “accelerated.” So Twitter is growing its top line, shooting for a big 2023 goal that it set years ago and still seeing user growth as it hums toward more than $6 billion in 2022 revenue, all the while working to limit its float so that future earnings are more impactful on per-share basis.

Boo hoo; what a mess.

Anyway, what’s it worth?

In his offer, Musk said something that I enjoyed:

I am offering to buy 100% of Twitter for $54.20 per share in cash, a 54% premium over the day before I began investing in Twitter and a 38% premium over the day before my investment was publicly announced.

The first number is meaningless; it has nothing to do with the price that is being offered now. If I buy six apples from you one week at a buck a pop and then come back and decide that I want to buy your orchard, the price I paid for the early fruit is somewhat immaterial.

The 38% number is more interesting. Here we can see the impact of Musk buying Twitter stock and, for a minute, consider getting a board seat. But what we should care about is not precisely the sheer premium between pre-Musk and post-Musk Twitter value; instead, we should consider the company’s worth, and then stack that against the Musk figure.

Twitter’s 52-week high is $73.34 per share, or 35.3% greater than the price Musk is willing to pay today. Twitter shareholders who held through 2021 into 2022 are being asked to accept a far lower price for the company’s shares than they saw in Q3 and Q4 of last year — a period that is not that long ago. I wonder if they are going to come down in favor of the deal or not.

If I was a Twitter shareholder who recalls the stock trading north of $60 for a chunk of 2021, seeing Musk swoop in and snag the company for $54 per share and change would seem a little cheap. A little lowball. After all, if we presume that Twitter misses its growth guidance and only scales to, say, $6 billion, I am letting go of all future upside of my Twitter shares for a loose revenue multiple today of 7.2x. Is that rich enough to take a well-known — and highly valuable — public company off the table?

Certainly, the answer was no before the selloff that brought tech stocks down a peg from their 2021 highs.

Sticking to generally high-level metrics to avoid diving deep into discrete growth efforts and monetization progress, it’s a little hard to see how Musk is really offering that much value here. If you already owned Twitter stock, you believed in its growth story, else you would have left when the CEO chair turned over last year. That means that Musk is effectively arguing that current Twitter shareholders are sad and want to cash out, not expecting to see 2021 prices for their company return anytime soon. Maybe!

But mostly what this saga feels like is this: Musk bought a bunch of Twitter stock, expecting to bully the company into getting his way. Then he had to drop the board seat idea, for whatever reason you think most likely. Now he’s back with a somewhat middling offer to buy the company out of what smells mostly like pique. You won’t let me have my way with a nearly 10% stake? Ha ha I will buy 100%! Something like that.

The offer doesn’t seem quite large enough to be serious. Throw another $10 billion on it and then let’s talk.

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