With Elon Musk sealing a $44 billion deal for Twitter, Wall Street experts are sharing their takes on what the planned sale says about the social media giant, what implications it will have on the broader digital advertising space and whether the mercurial Tesla boss will be a good fit for the firm.
“Twitter: Run … to the Bank,” MoffettNathanson analyst Michael Nathanson, who has had a “neutral” rating on the stock, entitled his report. His key takeaway: “We did not believe another bidder was out there and that Elon Musk’s offer was a steal of a deal for shareholders given the operating, monetization and valuation challenges at the company. Twitter’s sale for $54.20 is final evidence that the idea of Twitter has been far more valuable than the actual long-run operations of Twitter!”
Twitter founder Jack Dorsey also tweeted about Twitter as an idea and a possibility after Monday’s deal announcement, saying: “The idea and service is all that matters to me, and I will do whatever it takes to protect both.”
Meanwhile, Evercore ISI analyst Mark Mahaney addressed key questions investors are likely to have, including whether Twitter will become a “better” platform under Musk’s ownership. “Hard to say,” the Wall Street expert argued. “We have been strongly and consistently of the view that product innovation on behalf of both consumers and advertisers has been weak at Twitter for many years. Twitter management has acknowledged this. So the easy conclusion is that Twitter under Musk is unlikely to get worse in terms of product innovation. Whether it gets better or not is unclear.”
Mahaney also addressed a potential advertiser exodus. With Musk having made “almost no mention of Twitter’s advertising customers” and emphasizing its subscription product, “there is a distinct possibility that marketers will take their ad campaigns to other platforms (Google, Facebook, Snap, TikTok, Reddit, etc.),” he argued.
“As for consumers, our extensive survey work over the past seven years just hasn’t picked up a strong consumer interest in Twitter’s content moderation policies, which is a big focus of Musk,” Mahaney also highlighted. “We’re skeptical that less moderation will lead to a material rise in user growth. And interest in a subscription offering has always been limited in our surveys, with only 13 percent of respondents in our latest survey expressing interest. That said, Musk’s ideas of allowing tweet edits and removing text character limits strike us as very sound and user-friendly.”
Did Twitter’s board “make the right decision by shareholders” with the sale to Musk? “That depends on two things,” Mahaney argued. “How much confidence one has that Twitter’s board and management team could deliver on their publicly stated 2023 goals ($7.5 billion in revenue and 315 million daily active users, DAUs). And when the market for growth equities would come back.” After all, “Musk’s bid with its significant premium occurred during a tech bear market when Twitter shares were 50 percent off late ‘21 highs,” the Evercore ISI expert highlighted.
Ahead of Twitter’s latest financial update on Thursday, analyst Nathanson also shared his thoughts on business implications of and takeaways from the Musk deal. “It is interesting the board accepted the deal just three days before Twitter reports first-quarter 2022 earnings,” he wrote. “Last week, Snap’s quarterly earnings showed that brand advertising has fared worse than performance advertising amidst macroeconomic pressures, such as rising inflation, supply chain shortages and the war in Ukraine. We believe Snap’s relative weakness in brand advertising (which we estimate accounts for around a fourth of Snap’s ad revenues), was a negative read-through to Twitter, which is the most exposed to brand spending among the leading digital ad platforms (brand was 85 percent of Twitter’s ad revenues in 2021).”
What does all this mean for the future of brand and other advertising on social and digital channels? “We expect advertisers will be less willing to spend on Twitter if Elon Musk removes content moderation in order to promote free speech,” Nathanson wrote. But he also emphasized: “We continue to believe that performance advertising is the core driver of digital (and total) U.S. ad spend going forward, and we do not expect Twitter’s acquisition by Elon Musk to notably alter this trajectory.”
Cowen’s John Blackledge also discussed the role ad trends may have played in the social media giant’s decision to accept Musk’s bid. “While the offer is a significant 38 percent premium to early April levels, it’s near the midpoint of Twitter’s 52-week trading range and a 26 percent discount to the most recent annual high,” he highlighted. “That said, as macro and market conditions deteriorated over the past few months, coupled with the potential near-term impact of the Ukraine conflict on Twitter’s brand advertising, the board may have felt it would be difficult to achieve a similar or greater valuation to the proposed offer in a short to medium timeframe. Also, given the different macro headwinds (rising interest rates, rising inflation, supply chain issues etc.), the board may have also considered a potential U.S. recession on the horizon, which would impact Twitter’s brand ad biz and share price levels.”
Blackledge also noted that the social media firm has felt the need to refocus its ad business: “Twitter’s management has worked over the years to continue to improve the platform for users and advertisers, most recently upgrading its ad tech stack in an effort to increase the rollout of direct response (DR) ad units aimed at achieving its goal of increasing DR advertising to 50 percent of total advertising revenue mix versus 15 percent currently, which lags social peers.”
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