I am not a prolific user of social media
platforms, completely inactive on Facebook and a casual lurker on
LinkedIn, but I do use Twitter occasionally, and have done so for a long
time, with my first tweet in April 2009, making me ancient by Twitter
standards. That said, I tweet less than ten times a month and follow
only three people (three of my four children) on the platform. I am also
fascinated by Elon Musk, and even more so by his most prominent
creation, Tesla, and I have valued and written about him and the company
multiple times. When Musk made news a little over two weeks ago, with
his announcement that he owned a major stake in Twitter, I could not
stay away from the story, and what’s happened since has only made it
more interesting, as it casts light on just Musk and Twitter, but on
broader issues of the social and economic value of social media
platforms, corporate governance, investing and how politics has become
part of almost every discussion.
The Twitter Story
To
get a measure of Musk’s bid for Twitter, you have to also understand
the company’s path to its current status. In this section, I will focus
on the milestones in the company’s history that shape it today, with an
eye on how it may affect how this acquisition bid plays out.
Inception to IPO
Twitter
was founded in 2006 by Jack Dorsey, Noah Glass, Biz Stone and Evan
Williams, and its platform was launched later that year. It succeeded
spectacularly in attracting people to its platform, hitting a 100
million users in 2012, and then doubling those numbers again by 2013,
when it went public ,with an initial public offering. In a post on this blog on October 5, 2013, I valued Twitter, based on the numbers in its prospectus:
![]() |
Spreadsheet with valuation |
In
keeping with my belief that every valuation tells a story, my IPO
valuation of Twitter in October 2013 reflected my story for the company,
as a platform with lots of users, that had not yet figured out how to
monetize them, but would do so over time. My forecasted revenues for
2023 of $11.2 billion and predicted operating margin of 25% in that year
reflected my optimistic take for the company, with substantial
reinvestment (in acquisitions and technology) needed along the way (as
seen in my reinvestment). A few weeks later, the offering price for
Twitter’s shares was set at $26, by its bankers, and the stock debuted
on November 7, 2013, at $45. In the weeks after, that momentum continued
to carry the stock upwards, with the price reaching $73.31 by December
26, 2013.

If
the story had ended then, the Twitter story would have been hailed as a
success, and Jack Dorsey as a visionary. But the story continues…
The Rise and Fall of Jack Dorsey
In
the years since its IPO, the Twitter story has developed in ways that
none of its founders and very few of its investors would have predicted.
On some measures of user engagement and influence, it has performed
better than expected, but in the operating numbers measuring its success
as a business, it has lagged, and the market has responded accordingly
Users: Numbers and Engagement
In
terms of user numbers, Twitter came into the markets as a success, with
240 million people on its platform in November 2013, at the time of its
public offering. In the years since, those user numbers have grown, as
can be seen in the chart below:

In
keeping with disclosure practices at other user-based companies, in
2017, Twitter also started tracking and reporting the users who were
most active on its platform, by looking at daily usage, and counting
daily active users (DAU). While total user numbers have leveled off in
recent years, albeit with a jump in 2021, the daily active user count
has continued to climb.
Over the
last decade, the company’s platform, and the tweets that show up on it,
became a ubiquitous part of news, culture and politics, as politicians
used the platform to expand their reach and spread their ideas and
celebrities built their personal brands around their followers. Looking
at the list of the Twitter persona with the most followers provides some
measure of its reach, with a mix of politicians (Barack Obama, Narendra
Modi), musicians (Justin Bieber, Katy Perry, Taylor Swift, Ariana
Grande), celebrities (Kim Kardashian) and sporting figures (Cristiano
Ronaldo). Sprinkled in the list are brands/businesses (YouTube, CNN
Breaking News), with millions of followers, though relatively few
business people make the list, with Elon Musk being the exception. It
is worth noting that many of the people on top follower list tweet
rarely, and that behavior is mimicked by many of the users on the
platform, many of whom never tweet. The bulk of the tweets on the
platform are delivered by a subset of users, with the top 10% of users
delivering 80% of the tweets.
While
there are multiple reasons that Twitter users come to the platform, the
demographics of its platform provides some clues, especially when
contrasted with other social media platforms:
![]() |
Pew Research |
Twitter’s
user base skews younger, more male, more educated and more liberal than
the US population, and especially so, when compared with Facebook,
which has the biggest user base.
Revenues, Profits and Stock Prices
As
Twitter user base and influence have grown, there has been one area
where it has conspicuously failed, and that is on business metrics. The
company’s revenues have come primarily from advertising (90%) and while
these revenues have grown, they have not kept up with user engagement,
as can be seen in the chart below:

In
the last few years, revenue growth has flattened, again with the
exception of 2021, and while operating margins have finally turned
positive in the last five years, there has been no sustained upward
movement. To give a measure of Twitter’s disappointing performance, note
that the company’s actual revenues in 2021 amounted to $5.1 billion,
well below the $9.6 billion I estimated in 2021 (year 8 in my IPO
valuation) as revenues in my IPO valuation of the company in November
2013, and its operating margin, even with generous assumptions on
R&D, was 19.02% in 2021, still below my estimate of 19.76% in that
year.
The disappointments on the
operating metric front has played out in markets, where Twitter’s stock
price dropped to below IPO levels in 2016 and its performance has lagged
its social media counterparts:
![]() |
Source: Bloomberg |
In
fact, Twitter’s stock prices did not breach their December 2013 high of
$73.31 until February 26, 2021, when the stock peaked at $77.06, before
dropping back to 2013 levels again by the end of the year. The company
that provides the best contrast to Twitter is Snapchat, another company
that I valued at the time of its IPO in February 2017 at $14.4 billion,
with a value per share of $10.91. Like Twitter, Snapchat had a rousing
debut in the market, rising 40% to hit $24.48 on its first trading day,
before falling on hard times, as Instagram undercut its appeal. The
stock dropped below $6 in 2019, before mounting a comeback in 2021.
While Snap is a younger company than Twitter, a comparison of the
operating metrics and user numbers yields interesting results:

Looking
at the 2021 numbers, Snap now has more daily active users than Twitter,
but delivers less in revenues and is still losing money. That said, the
market clearly either sees more value in Snap’s story or has more
confidence in Snap’s management, since there is a wide gap in market
capitalizations, with Snap trading at a premium of 60% over Twitter.
Corporate governance
While
Twitter can be faulted on many of its actions leading into and after
its IPO, there is one area where credit is due to the company. In a
period when companies, especially in the tech sector, fixed the
corporate governance game in favor of insiders and incumbents, by
issuing shares with different voting classes, Twitter stuck to the more
traditional model, with equal voting right shares. It is also worth
noting that Twitter came into its IPO, with a history of bloodletting at
the top, with Jack Dorsey, who led the company at the start, getting
pushed aside by Evan Williams, his co-founder, before reclaiming his
place at the top. In fact, at the time of its IPO, Twitter’s CEO was
Dick Costolo, but he was replaced by Dorsey again, a couple of years
later. Dorsey’s founder status gave him cover, but his ownership stake
of the company was not overwhelming enough to stop opposition. As
disappointment mounted at the company, the murmuring of discontent
became louder among Twitter shareholders, especially since Jack divided
his top executive duties across two companies, Twitter and Square, both
of which demanded his undivided attention.
The
corporate governance issues at Twitter came to a head in 2020, when
Elliott Management, an activist hedge fund, purchased a billion dollars
of Twitter stock, and demanded changes. While Dorsey was successful in
fighting off their demands that he step down, he surprised investors and
may company employees when he stepped down in November 2021, claiming
that he was leaving of his own volition. That may be true, but it seemed
clear that the relationship between Dorsey and his board of directors
had ruptured, and that the departure might not have been completely
voluntary. As a replacement, the board did stay within the firm in
picking a successor, Parag Agrawal, who joined Twitter as a software
engineer in 2011 and rose to become Chief Technology Officer in 2017.
The Musk Entree!
It
is ironic that the threat to Twitter has come from Elon Musk, who has
arguably used its platform to greater effect than perhaps anyone else on
it. There are some Twitter personalities who have more followers than
Musk, but most of them are either inactive or tweet pablum, but Musk has
made Twitter his vehicle for selling both his corporate vision and his
products, while engaging in distractions that sometimes frustrate his
shareholders. While he has made veiled promises of alternative platforms
for expression, it was a surprise to most when he announced on April 4,
2022, that he had acquired a 9.2% stake in the company. Stock prices
initially soared on the announcement, but what has followed since has
been one of the strangest corporate chronicles that I have ever
witnessed, as you can see in the time line below:

This
post is being written on April 19, and the only thing that is
predictable is that everything is unpredictable, at the moment, and that
should come as no surprise, when Musk is involved.
The Value Arguments: Status Quo and Potential
While
Musk’s acquisition bid is anything but conventional, the gaming that it
initiated on the part of Twitter, the target company, and Musk, the
potential acquirer, was completely predictable. The company’s initial
response was that it was worth great deal more than Musk’s offering
price, and that Twitter shareholders would be receiving too little for
their shares if they sold. Musk’s response was that the market clearly
did not believe that current management could deliver that higher value,
and that he would be able to do much better with the platform.
Twitter’s
argument that Musk was lowballing value, by offering $54.20 per share
for the company, and that the company was worth a lot more is not a
novel one, and it is heard in almost every hostile acquisition, from
target company management. That argument can sometimes be true, since
markets can undervalue companies, but is it the case with Twitter? To
answer that question, I valued Twitter on April 4, at about the time
that Musk announced his 9.2% stake, updating my story to reflect a solid
performance from the company in 2021, and with Parag Agrawal, its newly
anointed CEO:
![]() |
Spreadsheet with Twitter Status Quo Value |
my story, which I view as upbeat, given Twitter’s inability to deliver
on operating metrics in the last decade, I see continued growth in
revenues, with revenues reaching almost $13 billion in 2033, and a
continued increase in operating margins to 25%, not quite the levels you
see at the dominant online advertising players (Facebook and Google),
but about what you would expect for a successful, albeit secondary,
online advertising platform. (Note that I am capitalizing R&D
expenses to give the company healthier margins right now, to begin my
valuation). The value per share that I obtained was about $46, $ 4
higher than the prevailing stock price, but below Musk’s acquisition
offer of $54.20.
the critique that revenue growth could surprise and that margins could
be higher, my answer is of course, and to incorporate the uncertainty in
my inputs, I fell back on one of my favored devices for dealing with
uncertainty, a Monte Carlo simulation. I picked three variables, the
revenue growth over the next five years, the target operating margin and
the initial cost of capital, to build distributions around, and the
results of the simulation are below:

median value in the simulation is $45.17, close to the base case
valuation, but at least based on my estimates, Musk’s offering price is
at the 75th percentile of value. It is possible that the value could be
higher but making that is not a particularly strong argument to make, if
you are Twitter’s board.
Competing Views: The Fight for Twitter
As
a company that has lived its entire life on the promise of potential,
it should come as no surprise if that is where the next phase of this
argument heads. In particular, Twitter’s management will claim that the
company’s platform has the potential to deliver significantly more
value, either by changing the business model (and including
subscriptions and other revenue sources) or fine tuning the advertising
model. On this count, Musk will agree with the argument that Twitter has
untapped potential, but counter that he (and only he) can make the
changes to Twitter’s business model to deliver this potential. In short,
investors will get to choose not only between competing visions for
Twitter’s future, but also who they trust to deliver those visions.
The
problem that Twitter’s management will face in mounting a case that
Twitter is worth more, if it is run differently, is that they have been
the custodians of the company for the last decade, and have been unable
or unwilling to deliver these changes. Shareholders in Twitter will
welcome management’s willingness to consider alternative business
models, but the timing makes it feel more like a deathbed conversion
rather than a well thought through plan. Elon Musk’s problem, on the
Twitter deal, is a different one. If you think Jack Dorsey was
stretching the limits of his time by running two companies, I am not
sure how to characterize what Musk will be doing, if he acquires
Twitter, since he does have a trillion dollar company to run, in Tesla,
not to mention SpaceX, the Boring company and a host of other ventures.
In addition, Musk’s unpredictability makes it difficult to judge what
his end game is, at least with Twitter, since he could do anything from
selling his position tomorrow to bulldozing his way through a poison
pill, taking Twitter down with him. I know that there are question of
how Musk finance the deal and whether he can secure funding, but of all
of the impediments to this takeover, those might be the easiest to
overcome. The fact that Twitter’s stock price has stayed stubbornly
below Musk’s offering price suggests that investors have their doubts
about Musk’s true intentions, and whether this deal will go through.
Alternate Endings
No
matter what you think about Elon Musk and how his acquisition bid will
play out, it is undeniable that he has put Twitter in play here, and
that it is likely that the company that emerges from this episode will
look different from the company that went into it. In particular, I see
four possible outcomes for Twitter:
- Status Quo:
It is possible that Twitter wins this round with Musk, and that the
poison pill adopted by the board is sufficient to get him to walk away
from the deal, perhaps selling his holdings along the way. The existing
management go back to their plans for incremental change that they have
already put in motion, and hope that the payoffs of higher revenue
growth and profitability will unlock share value. - Musk takes Twitter private:
Having spent more than a decade seeing Musk pull off what most market
observers would view as impossible, I have learned not to underestimate
the man. For Musk to succeed at this point, he has to be able to buy
enough shares in a tender offer and/or convince other shareholders to
put pressure on the board to remove the poison pill, and allow him to
move forward with his plans. The odds are against success, but then
again, this is Elon Musk. - Independent, but with corporate governance changes:
Even if Twitter is able to fend off Musk, the way that the company’s
management and board have handled the deal does not inspire confidence
in their ability to run the company. In fact, having gone through five
CEOs over Twitter’s life, it is worth asking the question whether the
dysfunction at the company lies with the board, and not just with the
CEO. In this scenario, institutional investors will follow through by
pushing for change in the company, translating into new board members
and perhaps even a new CEO. - Someone else acquires Twitter:
There may be something to Musk’s claim that the changes that are needed
to make Twitter a functional business can only be made, if it is taken
private. If so, it is the board may be willing to sell the company to
someone other than Musk, albeit at a slightly higher price (if for no
other reason than to save face). The fact that the buyer may be Silver
Lake, a firm that Musk has connections with, or another private equity
investor, whose plans for change are similar to Musk’s, will mean that
Elon Musk will have accomplished much of what he set out to do, without
spending $43 billion dollars along the way or having to deal with the
distractions that owning Twitter will bring to his other, more valuable,
ventures.
these possibilities in terms of likelihood, I would put “staying
independent with significant corporate governance changes” as most
likely, followed by someone else acquiring Twitter, with the status quo
and Musk succeeding getting the lowest odds.
Political Markets?
In
this discussion, I have deliberately stayed away from the elephant in
the room, which is that this is , at its core, a political story, not a
financial one. To see why, consider a simple test. If you tell me which
side of the political divide you fall on, I am fairly certain that I
will be able to guess whether you favor or oppose Musk’s takeover bid.
As with most things political, you will provide an alternate, more
reasoned, argument for why you are for or opposed, but you are deluding
yourself, and hypocrisy is rampant on both sides.
- If
you are opposed to the deal, and your argument is that billionaires
should not control social media platforms, that outrage cannot be
selective, and you should be just as upset about Jeff Bezos owning the
Washington Post or a George Soros bid for Fox News. If it is Musk’s
personality that you feel is what makes him an unsuitable owner, I
wonder whether we should be requiring full personality tests of the
owners of other media companies. - If
you are for the deal, and it is because you want Twitter to be a
bastion of free speech, it is worth remembering that every social media
platform is involved in some degree of censoring, for legal reasons and
self preservation. It should also be noted that while those disaffected
with Twitter have attempted to build their own social media platforms,
they still get far more mileage from their presence on Twitter than from
their posts on alternate platforms, and the complaints about Twitter
not being balanced seem to end up being on Twitter.
hand wringing from pundits about changes that may or may not be coming
to Twitter, and the impact it will have on our collective consciousness,
to be over wrought. In fact, some critics of Musk seem to have decided
that Twitter, in its current form, is a national treasure that needs to
be preserved or at least protected from money grubbing barbarians. I beg
to differ. The brevity (of having to compress your thoughts into 280
characters) and timeliness of Twitter’s platform has made it the place
to go to get breaking news, but the notion that it is an educational
platform shortchanges the meaning of learning, and the impulsiveness
that it encourages from users is a recipe for tweeting remorse, or
worse. I believe that while there are some who come to Twitter for news
and witty repartee, many come to the platform for the same reasons that
they slow down on highways to look at car crashes, i.e., to witness, and
sometimes partake in, deranged arguments about trivial issues. Much as
we like to complain about the ugliness and anger that we see on social
media, it is exactly those forces that draw users to it, and arguing
that Elon Musk will make it worse, misses the point that he symbolizes
the strengths and weaknesses of the Twitter platform better than any
other person walking the face of the earth.
https://m.janatna.com