On July 8, Twitter dtopped to a four-month low after Elon Musk officially rescinded his offer to buy the company for $44 billion. In an SEC filing, Musk's legal representative said that Twitter violated the deal by making "false and misleading statements" about the number of "fake or spam accounts" on the social network.
The legal team also stated that Musk had "reason to believe that the true number of false or spam accounts on the Twitter platform is significantly higher than the less than 5% that Twitter reported in its Securities and Exchange Commission filings," and that the failure to estimate the true number of monetizable daily active users (mDAUs) was skewing the growth prospects of its core advertising business.
In response, Twitter filed a lawsuit against Musk. In a tweet, Chairman Bret Taylor said the board remains "committed to completing the deal at the price and on the terms agreed to by Mr. Musk, and plans to go to court to enforce the merger agreement."
As this legal struggle develops, the Twitter stock is supossed to move sideways and stay well lower Musk's "best and final offer" of $54.20 per share. Is it too late to buy Twitter stock, which has actually posted negative earnings since its first post-IPO deal in November 2013?
When Twitter went public, then-CEO Dick Costolo said the platform could reach 400 million monthly active users (MAUs) by the end of 2013. The company as a whole did not meet that goal; instead, it began to lose MAUs and eventually replaced that metric with the current mDAU metric in 2019.
In 2021, Twitter's mDAUs increased 13% to 217 million, and the company says it could reach 315 million mDAUs by the end of next year. This goal seems extremely optimistic, as it would require Twitter's mDAU growth to rev to about 20% in 2022 and 2023. The company also claims it could generate $7.5 billion in revenue in 2023, which would require it to grow revenue at a compound annual growth rate (CAGR) of 21.5% over the next several years.
Twitter has not yet withdrawn that forecast, but analysts expect the company's revenue to grow only 16% this year and only 22% in 2023 to $7.2 billion.
In April, Twitter also admitted that it had miscalculated the number of mDAUs over the past three years by counting multiple accounts for a single user as separate mDAUs. Twitter says the error only influenced about 2 million mDAUs, but the mistake -- which only surfaced after Musk made his suggestion -- has raised alarm bells about spam accounts.
Twitter co-founder Jack Dorsey, who succeeded Costolo in 2015, launched new features like the short-lived "Fleets" feature, organized "themes" for tweets, new tip services, and verified "Twitter Blue" subscriptions for top accounts - but the company was still trying to move beyond its niche.
Dorsey left last year and was succeeded by Parag Agrawal, who focused on increasing Twitter's share of higher-value advertising and introducing new e-commerce features to become a "social commerce platform" like Meta Platforms' Pinterest and Instagram.
Twitter has continued to grow over the past three years, but its revenue growth has been erratic. In 2019, its net income was boosted by a $1.21 billion tax break. In 2020, the company posted a net loss after incurring $1.1 billion in tax and coronavirus expenses.
Last year, the company posted another net loss after paying $766 million in legal fees to settle a class-action lawsuit regarding MAU growth projections made in 2014. The effect of these taxes and legal fees can be seen in the gap between reported and adjusted earnings, which excludes these expenses.
In May this year, Twitter settled a $150 million privacy lawsuit with the Department of Justice (DOJ) and the Federal Trade Commission (FTC). If Twitter sues Musk, it could incur even more legal costs this year.
Experts anticipate Twitter to make a net profit of $540 million this year, thanks in part to the recent $1.05 billion sale of MoPub to AppLovin, but in 2023 the net profit will be much lower at $130 million.
Twitter will get $1 billion in compensation from Musk if it just lets him walk away. This seems like a more sensible and cost-effective solution that would finally allow Agrawal to reboot Twitter's business.
Twitter's stock is still not cheap - it is worth nearly 40 times next year's adjusted earnings. Macroeconomic factors are likely to force the company to leave its unreal growth targets for 2023, and its decision to sue Musk instead of agreeing to a severance package raises additional red flags. Simply put, now is still not the time to buy stock in this volatile social network.
As long as the price is below the 35.00 level, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 32.50
- Take Profit 1: 31.00
- Take Profit 2: 29.00
Alternative scenario:
If the level of 35.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 35.00
- Take Profit 1: 37.00
- Take Profit 2: 39.00
