Does it make sense to buy a company for $44B that has lost $2.6B in its lifetime? On the surface, hell no.
Yet I think Elon buying Twitter makes all kinds of sense for Elon. I won’t look at this from the consumer angle (this hurts my head), but instead why this makes perfect sense for Elon. Here’s why:
Financially Sound… After a Few Tweaks
While Twitter has lost $2.6B, I still think they are in a fundamentally sound position. Twitter is now making money, even while the company has bloated expenses. They are profitable and will continue to be profitable without any major changes. The problem is that Twitter’s profitability barely covers the interest Elon will pay on the debt he took out to buy Twitter. Turns out that even the richest of the rich don’t have $44B laying around.
If Elon wants, he can quickly come in and trim the fat around Twitter to make this even more profitable. Elon already has ideas of his own to save millions of dollars. Ben Thompson laid out the obvious fat to trim:
Twitter, as of the end of 2021, had 7,500 full-time employees. That, to be perfectly honest, is a lot, particularly given the anemic nature of Twitter’s business: the average Twitter employee generates $677k in revenue (for reference, each of the 35,587 71,970 Facebook employees generates $3.3 $1.6 million in revenue).
Twitter spends just over $3 billion on Research & Development, Sales & Marketing, and General & Administrative; for the sake of argument let’s assume that those costs are Twitter’s employee costs, which means each employee costs Twitter around $401k/year (this obviously isn’t correct, but it’s close enough for this exercise).
$12.5 billion more in debt (to refinance the margin loan) would require $564 million more a year in free cash flow (at an interest rate of 4.51%); that is about 1,400 employees at $401,000/employee.
Honestly many of Twitter’s employees might quit. Working for Elon and working for the past owners of Twitter are far different.
I do believe Twitter still has plenty of other options for monetization as well. This company hasn’t shown historical optionality, but they do have plenty of future optionality and started to show this in the past few years. I owned Twitter stock, so obviously I think it has financial potential.
A Historically Dysfunctional Company
It’s easy to improve something that has been terribly run. I’m a fan of Jack, but Twitter was a train wreck before he came back. It’s too early to tell if Parag will be a successful CEO or not.
Here are a few examples of a dysfunctional Twitter:
- They’ve lost $2.6B in 15 years of existence
- A history of “mired plots and coups”
- Board that owns no stock
- Feeds are filled with easily identifiable bots
And this is all just from the last couple of weeks.
It’s easy to see a future where improved management can lead to an improved financial future for Twitter (and Elon).
Owning the Overton
The Overton window is “the range of policies politically acceptable to the mainstream population at a given time”. Other times it is called the window of discourse. I’ll try not to get too political here, but social media undeniably plays a role in where this window lies. The easiest example to me is many of the practices Twitter, Facebook and many others put in around COVID. These companies began to ban accounts who were spreading “misinformation” about COVID. The problem is, some of this information later turned out to be true as we learned more. At a time, you might get banned for saying COVID originated from the Wuhan COVID lab. Now Jon Stewart openly jokes about it. The window of discourse opened and shut relatively rapidly, all with the support of social media companies. Now Elon controls how he wants to open and close the window of discourse. Society still has plenty of control over this, but in theory now the window won’t be locked shut. I don’t trust anyone with this power (Elon included), but it does benefit Elon to have this power.
Rich people love status symbols. In many ways that’s why Tesla has been successful. Owning a Tesla tells people you are cool! Much like other billionaires purchase sports teams, Elon buying Twitter is a form of a status symbol. He already dominated the narrative, but now he will be in front of all kinds of different conversations. Bezos and Buffett bought newspapers for these reasons, Elon bought the new source of information.
From Tesla to Twitter
Selling isn’t cool, especially when you are the founder. Elon owns a shit ton of Tesla stock that is trading at a historically inflated multiple. Buying Twitter is a great excuse to diversify.
Asymmetries in Market Caps
Fundamentally, it all comes down to an asymmetry into the valuation of Twitter versus the importance of Twitter. All of the points I made all come back to this. Twitter has a trillion dollar impact at a $44B market cap.