The situation at Twitter isn’t as bad as the media hype would suggest

From Reuters, Elon Musk’s X is a black hole of value:

Put it all together, and X isn’t just worth less than Musk paid for it, but likely less than its debt. Assume that the company’s revenue last year was $4.7 billion, based on results before it was taken private. If advertising has dropped by half, then this year’s sales should be a bit over $2.5 billion. Put that on the same enterprise-value-to-sales multiple as Snap, which is down to a mere 3 times, and X is worth around $8 billion.

The media, which also heavily relies on Twitter, that for the duration of this article I will refer to by its old name, not X, can hardly contain its excitement. Same for popular Twitter users, like Nassim Taleb:

Incorrect.
I love Twitter. But it is "worth" less than $8 billion, assuming it will generate some cash flow. Assuming… https://t.co/VNCgOCvV7L

— Nassim Nicholas Taleb (@nntaleb) March 27, 2023

There is a weird sort of cognitive dissonance in which many people who use Twitter regularly and who apparently seem to derive enjoyment from the service, at the same time want to see it fail. I have never seen such a product before that is so popular, and yet many of its users are also rooting against it. I guess the idea or hope is Twitter operates as a sort of non-profit, in which Musk takes a total loss on his investment yet Twitter remains intact, or Musk cuts his losses and the site is returned to its old or new owners.

There is no way to sugarcoat this though: Elon is in the red. A lot. His timing was terrible, having paid $44 billion at a near-top of the stock market in April 2022, just before a major decline to follow. Had he waited half a year he probably could have gotten a $10 billion discount, which is probably why he tried to back out of the deal. But the media overlooks that in order to have purchased Twitter, Musk had to pay some sort of premium above the closing price; this was unavoidable, as the board would not have agreed to the sale otherwise, even if they liked the new owner. So a large paper loss was unavoidable even if his timing was perfect.

Conversely, if Musk was to take Twitter public, he would likely get a premium during the IPO, negating some of his earlier loss. The average IPO ‘pop’ according to data from 1980-2020 is around 20%, due to underwriters pricing the stock too low and underestimating public demand, although some of this pop may be intentional. So Twitter could go public at an ‘official’ valuation of $10 billion, and after its first day of trading have a 20% pop, valuing it at $12 billion if history is any guide.

It bears repeating Twitter is a black box, meaning it is not required to disclose anything to the public. We take for granted the transparency of SEC filings, conference calls, and having information at our fingertips, but private companies are able to operate in total secrecy. It’s one of the benefits of going private even if it means a lower valuation compared to being public, which to some CEOs is a worthwhile tradeoff. Thus, we have no way of truly knowing how popular (or unpopular) Twitter is, or how many Twitter Premium/Blue users there are, or how many advertisers have defected, etc. All estimates are based off of rumors, voluntary disclosures by management or other insiders, and various third-party analytics services.

But it’s not all bad. Despite losing some advertisers, some of this is negated by running more ads, and also Twitter Blue and Gold subscriptions. The latter is pure top-line earnings: It’s not like Elon is cannibalizing other revenue streams with premium subscriptions. Elon has also cut costs by making features that were otherwise free and un-metered, throttled or paid/premium. I see so many blue checkmarks now, indicative of a lot of paying users. Despite being the equivalent of a participation trophy that confers little benefit, Twitter Blue appears to be quite popular, with thousands or even millions of users paying the requisite $8-11/month even if the added visibility of a checkmark is minimal to none (having a checkmark is hardly remarkable when almost everyone else has one, too). The original blue checkmark was valuable for its rarity and actually standing out, but now they are everywhere. It would seem as if paying users have not woken up to this fact, or don’t care; either way, this is good for Twitter.

[Twitter Gold subscriptions, which are intended for businesses, are considerably more expensive, at $1,000/month.]

Regarding ads, yes, the median or mean advertiser is paying less, but the media ignores that there are more ads being shown, hence more ad impressions and clicks. Also, many of the ads are blended to resemble actual tweets, which means more clicks (you can hardly tell the difference):

Additional revenue sources include creator subscriptions, so-called ‘super followers’, similar to Substack or Patreon, although Twitter is paying out earnings through its revenue sharing program. Same for increasing the cost of access to its API.

Also, in the unlikely event Bitcoin makes another run at its old highs of $60k or more, this would be good for Twitter. Twitter is an indirect bet on crypto, being that cryptocurrency companies spend a lot on advertising, and that Twitter gets a lot of traffic from cryptocurrency-related hype (and many more scams too, like the above ad, which Elon is indifferent to [0]).

Engagement has also gone up due the intensification of politics and the worsening news cycle, such as the unfolding crisis in Gaza overseas or runaway inflation domestically. Engagement as measured by likes, re-tweets, comments, etc. of major political figures and pundits such as Tucker Carlson, Jordan Peterson, etc. has surged since Elon’s takeover. Tweets not uncommonly get 10k+ or more ‘likes’ compared to just 1-2k in early 2021 by those same people. Even if this engagement is not picked up by third-party trackers, I see it.

There is a sort of ‘Elon effect’ in terms of the power of Twitter to affect discourse and sentiment, whether it’s the runaway Chinese spy balloon in Feb 2023, UFO footage, or viral videos of looting and shoplifting of major retail stores across the country. Or even the power of popular Twitter users to coordinate boycotts of major brands, which has had arguably a significant effect on the share prices of Disney, Target, AB InBev (the maker of Bud Light) and other targeted companies. Anyone who signs up for Twitter, by default, is recommended to follow some of the most popular but polarizing people on the site, like Andrew Tate, AOC, or Tucker Carlson; is this good for the state or health of ‘public discourse’? Probably not, but is it good for engagement and ad revenue? Certainly, and Musk knows this.

Finally, to add, contrary to popular belief, Elon does not need to recoup the entire $44 billion to not lose money. I dunno where this idea came from that Elon needs to earn back his entire outlay, but if Twitter is able to demonstrate growth and even some profitability, he can take Twitter public at a decent-sized multiple. Revenue growth is probably more important for Twitter now than profitability as far as valuations are concerned. Elon also makes money indirectly by Twitter acting as an extension of his brand, such as Space-X and Tesla, as a form of unpaid advertising and PR.

Overall, there is little denying that Twitter has way more revenue sources now compared to under old management. What does all this mean in terms of an actual earnings figure? Again, we have have no way of knowing, but I would guess a lot.

[0] Remember that time a large tech company was alerted to an obvious fraud or scam and took swift efforts to rectify it before a lot of people lost money? Me neither.