News that well-known technology denizen Elon Musk intends to move forward with his proposed and accepted bid to purchase social media company Twitter was surprise news this week; Musk had fought in court against having to close the deal, arguing various issues with the company to avoid paying $54.20 per share for the former startup darling.
However, with the deal moving forward once again at a fixed price, we can now compare Musk’s purchase with data from other social media companies, effectively allowing us to see how expensive — or not — the transaction will prove.
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Naturally, we know the dollar value of the deal; the $44 billion price tag has been bandied about for so long that everyone should be able to recite the figure in their sleep. When we say expensive, however, we mean relative cost in contrast to the values of related entities. So we’ve dredged up pre-market data from Twitter, Snap,and Meta, parsing a number of key metrics from their respective valuations.
Is Musk paying a lot for Twitter, in terms of what rival companies are worth? I suspect you already know the answer, at least in part, but let’s do the math.
Here’s what happens if you force a company to accept your bid and then later have to close the deal after the stock market has sold off.
Comparative metrics
To understand what Musk is paying for Twitter, we need a few numbers. First, we’d like to know what revenue multiple the Tesla and SpaceX worker is buying into. We also want to know revenue growth, as that will help us compare price/sales multiples at rival firms, and how their valuations compare. And we’ll want a few profitability metrics. Say, forward price/earnings and enterprise value/EBITDA for fun.
For those of you who would like a refresher, we are at your service. Revenue multiples detail how much each dollar of revenue at a company costs. A 10x revenue multiple, loosely, means that for each dollar of revenue that a company generates, investors award it $10 of value. Growth is simple. For our purposes today, we’re looking at year-over-year growth for a company’s most recent quarter.
What about price/earnings? What’s that good for? The metric is akin to price/sales, but instead of comparing raw top line to corporate worth, we’re stacking up profits against market cap. This lets us understand how much investors are willing to pay for a company’s bottom line. And, finally, enterprise value/EBITDA will tell us the ratio of the company’s adjusted value (enterprise value deducts cash from a business’s value, while EBITDA is an adjusted profitability metric), a sort of massaged price/earnings figure.
Got that? Great. Let’s run the numbers:
Twitter, per YCharts data:
- P/S: 7.964x
- Revenue growth: MRQ YoY: -1.16%
- P/E ratio (forward): 49.44x
- EV/EBITDA: 62.19x
Snap, per YCharts data:
- P/S: 3.836x
- Revenue growth: MRQ YoY: 13.11%
- P/E ratio (forward): 185.46x
- EV/EBITDA: N/A
Meta, per YCharts data:
- P/S: 3.266x
- Revenue growth: MRQ YoY: -0.88%
- P/E ratio (forward): 14.34x
- EV/EBITDA: 7.00x
Bear in mind that the larger a revenue or profit multiple is, the more expensive it is.
From the above, we can see that Musk is about to pay double, or more, what other social networks are trading for when it comes to price/sales multiples.
This fact is exacerbated when we consider that YCharts calculates Twitter’s revenue growth as the worst of the three. Recall that revenue multiples are correlated with growth rates: The faster a company is stacking top line, the more investors are willing to pay for its present-day revenues. To see Twitter post the slowest growth of the three at a revenue multiple premium helps us understand why Musk wanted to find a way out of the deal. It’s not cheap.
The “oh wow” moments continue when we compare Twitter’s profit multiples with Meta’s. You get more bang for your buck if you buy stock in the Facebook parent company than you do if you, say, buy Twitter.com whole cloth for $54.20 per share.
Snap is a harder comparison, as the company’s long history of uneven profitability means that we don’t have every metric at hand that we’d want. Still, with the strongest revenue growth of the group, a price/sales result of around half of Twitter’s, you can find an easy argument that Twitter’s sale price is excessive.
How did we get here?
On April 14, Musk made his offer for Twitter. On April 25, Twitter accepted the transaction. Here’s where Meta and Snap closed on those days, and where they traded this morning:
Meta (Yahoo Finance data):
- April 14: $210.18 per share
- April 25: $186.99 per share
- Today: $137.71 per share
Snap (Yahoo Finance data):
- April 14: $33.19 per share
- April 25: $29.91 per share
- Today: $10.92 per share
This explains why Twitter’s sale price in today’s climate is so expensive. Musk is paying a price that was agreed to back when the public markets were valuing social media companies at far greater prices. This is a risk that one takes when buying a company — the valuation climate can change dramatically, and quickly.
You can see why Twitter would want to sell if it can get around twice the price it might otherwise command. The sale really does look like an attractive deal for current investors. How Musk’s financial backers see the final sale price is another matter, but somehow Musk and his coterie of wealthy friends are about to overpay dramatically for a service that they just spent weeks trashing.
We live in a weird world. Sometimes the dog really does catch the car.