Musk Overpaid for Twitter. What Comes Next?

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.

Just on the Tesla side alone, you could have everything else go up in flames, and I think he would still be seen as one of the most remarkable entrepreneurs and inventors of all time.

I sold my Tesla, Jack. I just don't— I don't like the man. I don't like what he stands for. And you think, okay, there's now enough electric cars where I have a choice.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard— voices belong to one bull and one bear, not just on Tesla stock, but on Elon Musk himself, his persona, his takeover of Twitter, the legacy he's building. Elon is America's new favorite wedge issue. In a moment, we'll explain how and whether he can improve Twitter and what that success or failure could mean for other parts of the Elon empire. Listening in is our audio producer Jackson. Hi, Jackson. Hi, Jack. This one is going to be a bit of a delicate dance, I think.

Yeah, what do you mean?

I want to talk about Twitter and Tesla and Elon Musk, so this should be a conversation about social networks, cars, little artificial intelligence, maybe a rocket or two. All business stuff and some of it investing stuff, which is squarely where I like to be. But as I mentioned just earlier and put in a story for Barron's this week, Elon is America's new favorite wedge issue, and that means politics, and that's not where I want to be. Because in politics, everyone's always sniffing each other to see which side they're on, and I'm not much of a joiner or a sniffer, and I don't love the thought of being sniffed. If we were just talking about governing, fine, we could discuss whether this or that program should be bigger or smaller, or more of a carrot or a stick, or for everyone or just certain income groups, and whether there should even be a program. And we'd say, what can the evidence tell us about the most efficient path? And for that, we'd look to history or the experience of other countries. There'd be lots of dollar signs and percentages, which I find soothing, but politics often isn't that. I think of it as being about achieving power. And I don't hear a lot of applause lines about evidence-based approaches to getting the best value per taxpayer dollar. I hear plenty that include personal attacks and strawman arguments and slippery slopes and false dichotomies and observational selection of red herrings. In other words, logical fallacies. And I find that frustrating, a little depressing, because it can lead to putting the best politicians in charge rather than the best policymakers. Jackson, are you sniffing me right now?

Definitely not. This is a no-sniff zone.

Well, thank you for that. I don't want a side, and I certainly don't want both sides, and I don't want the middle of the road. I want to wander back and forth to any part of the road I please on any particular topic. And by the way, I'd like for the road to be in good shape.

One question on that.

Yes.

Who are you voting for in the midterms on Tuesday?

I have some, uh, I have some misgivings about the shouty ones, but I'm also a little apprehensive about the shoutier ones. I vote that we move on to Elon.

I second the motion.

Okay, Tesla CEO and controlling shareholder Elon Musk is the new owner of Twitter, and mass layoffs were reportedly imminent at the time of this recording. And there appear to be big changes to the service in the works. And I see this as a pivotal moment for Musk, to the extent that people worth more than $200 billion can still have pivotal moments. He'll end up rich no matter what happens. Richer is another matter. So is what I'll call the Musk Mystique. Although now that I hear myself say those two words together, sounds like a Chuck Norris cologne that smells like barbecue sauce and cedar chips. What do you think, Jackson?

I think you're thinking of the Musk Mesquite.

There's a debate raging about just what to make of Musk. He has transformed the car industry and the economics of launching satellites, and he's arguably the biggest celebrity on Twitter. But what kind of job will he do running Twitter? It doesn't matter that Twitter could be a powerful political tool. What should we make of some of Musk's provocative tweets that increasingly appear to dip into politics? And of particular interest to this podcast, what are the chances of Musk earning a positive return on his Twitter investment, and how might that happen? And what effect, if any, will Musk running Twitter have on Tesla? And by the way, with Tesla stock down 45% over the past year, What's the outlook from here? Let's start with some basic Twitter facts from the Pew Research Center. 23% of US adults say they use Twitter. That figure has held steady in recent years. It gives Twitter about the same reach as Snap and WhatsApp. Twitter is much smaller than Instagram, and it's a pipsqueak compared with Facebook and YouTube. Pew reports that 32% of Americans who lean toward the Democratic Party say they use Twitter. That's 15 points higher than those who lean Republican. Also, nearly all tweets come from around one quarter of users, and nearly everyone who uses the platform says they have seen inaccurate or misleading information. You might recall that Musk disclosed a Twitter stake this past April that he had bought in mid-March, and then he made a $54.20 a share offer for the company. That unusually specific price includes a reference to 420, which is a popular cannabis reference, especially in Musk's tweets. I'm pretty sure he uses it in a self-aware, ironic way that nods to the silliness of something that used to be subversive, but I don't pretend to be a skilled Muskologist. What I do know is that the deal price now looks high because Twitter is a social media platform that makes most of its money from advertising, and advertising has weakened. Meta Platforms, the owner of Facebook, has had its stock cut in half since back when Musk bought his initial Twitter stake, and Snap is down by two-thirds. Even if we assume a smaller decline for Twitter, it's entirely possible that Musk just paid $44 billion for a company that would today be valued at $20 billion. Or less if he hadn't come along. Twitter's revenues were last pegged at just over $5 billion this year, which means the deal price is a high multiple of revenues. For that to make sense, Twitter would have to have high profit margins or be growing quickly or both, but its operating margins have recently been negative, and the last reported revenue growth figure from the second quarter was just 2% in constant currency. Musk says the purpose of the deal was not to make money, which is a good thing, I suppose. From here, he might have to multiply Twitter's value just to break even. But if the deal wasn't about making money, why did Musk try to back out of it until he got pushed back into it by a judge? Maybe it was mostly not about money, but he was trying to get a better price. Whatever the case, Twitter makes more than 90% of its money from advertising., and it has more to worry about than a general slowdown in ad spending. Our friends at the Wall Street Journal report that General Mills, Mondelez, Pfizer, Volkswagen, and other big advertisers have paused spending on Twitter, in at least some cases because of concerns over content moderation. Not many big companies are going on record about that. General Motors says it paused spending, but it competes with Tesla, so it'll naturally want to learn more about how that will affect its relationship with Twitter. Under Musk. After Musk took over Twitter, there were reports of a surge in racial slurs on the platform. I can't imagine any business owner would be happy about that, and it's a big problem for what advertisers call brand safety— keeping their brands from appearing next to objectionable content. On October 27th, Musk posted a long tweet addressed to advertisers. He said that the reason he bought Twitter is to, quote, "help humanity whom I love." He said he would do that by promoting healthy debate at a time when traditional media has, as he put it, fueled and catered to polarized extremes. Twitter, he wrote, quote, "obviously cannot become a free-for-all hellscape where anything can be said with no consequences." But 3 days later, Musk tweeted a baseless claim by a conspiracy website that a hammer attack on House Speaker Nancy Pelosi's husband was a result of a lover's quarrel. Hours later, the tweet disappeared without comment from Musk. So let's call brand safety a work in progress for now. Now I'm going to read word for word a tweet that Musk posted on Friday morning. Twitter has had a massive drop in revenue due to activist groups pressuring advertisers Even though nothing has changed with content moderation and we did everything we could to appease the activists. Extremely messed up! They're trying to destroy free speech in America. There's one more cause for a little financial urgency.

They would end up paying about $700 million in incremental interest per year based on the debt that they have.

That's Rohit Kulkarni. He's an analyst at MKM Partners who covered Twitter as a publicly traded company. Twitter took on $13 billion in debt for the Musk deal, and it now has to pay interest on that debt, which means it may have to cut costs in a hurry just to offset the interest. And one path to that seems to be laying off some of Twitter's 7,500 workers.

And assuming a fully freighted employee is around $300,000 all in on a gross basis, so that's, that's kind of 2,000 to 2,500 employees is what they need to reduce their current headcount by in the next 6 to 12 months.

Twitter is reportedly contemplating more than enough layoffs, but we'll have to see. One early report put the figure at 75% of workers, which Musk later denied. That can't have been great for morale, and it might be a problem for retaining the best workers.

The problem with announcing that you're going to lay off 75% of the people, or that leak, is that what happens is the 25% you don't want to leave leave first. Because the people with the most options are the ones who decide they don't want to stick around for some sort of Hunger Games or Russian roulette at the hands of a guy whose blood sugar level seems to dictate what he's going to do that day.

That's Scott Galloway, an entrepreneur, venture capitalist, and marketing professor at NYU. He's not a big Musk fan, which we'll come to. Rohit at MKM says that what Twitter needs most now is just to focus on its core operations.

Twitter is, in terms of users, is much smaller than it could be. How can they grow their user base? And the way they can grow it is by curbing misinformation, reducing the flow of real-time information, and various different ways. So I think that's number one. And number 2 is monetization will follow.

Rohit says that Twitter has been mismanaged and underappreciated and that with the right changes, it could become a major advertiser. He calls Musk a fantastic business person, and he's not ruling out Musk making a big financial return.

If things go well and if they clean up their act, probably, yeah, there is, there is a multibagger situation here if Twitter reaches its potential. It's probably one of the largest brand names in, in global There is not going to be another Twitter in the world.

One of the ways Twitter will try to make money from here is through subscriptions. It already has a $4.99 a month program called Twitter Blue. The features don't seem terribly exciting to me. There's the ability to undo a tweet just before others see it. Couldn't you just look over the tweet before you send it and save yourself $5? I don't know. Now Twitter appears to be preparing a new premium service that'll cost $8 a month and include user verification, those blue check marks, along with priority placement in replies and search results. There hasn't been an announcement yet, I guess you could say, but there have been tweets from Musk. He floated the idea of a $20 fee, and the writer Stephen King, who has a big following on Twitter and is pretty active there, wrote They should pay me. And Musk replied, how about $8? The Democratic congresswoman from New York, Alexandria Ocasio-Cortez, tweeted that Musk was trying to, quote, sell people on the idea that free speech is actually an $8 a month subscription plan. And Musk replied, your feedback is appreciated. Now pay $8. And both of these exchanges attracted the usual circus of commenters and meme slingers both for and against. And I guess that means the matter is settled? Scott at NYU says that turning a positive return on the $44 billion purchase price for Twitter will be a tough one, but that there is vast potential to make more money from Twitter.

Twitter has been kind of a 15-year lesson or experiment in proving that they can't compete with the scale and the ad stack of Meta and Google. But it has an incredibly loyal following amongst a very valuable audience, which again speaks to subscriptions. So I think where they'll ultimately head or end up is a subscription model based on the ability to capture surplus value.

There's also talk of turning Twitter into a super app. Or multi-function platform combining communication, financial services, shopping, and so on. Those are common in some Asian markets. Rohit from MKM doesn't see that as likely in Western markets, but I spoke with one Twitter investor who sees transactions as a good fit for Twitter.

The reason we're investing in the opportunity is because communications is the natural mechanism by which you get into kind of transactions and facilitating some of the business that happens on platforms and then inserting yourself in that transaction flow represents a monetization angle that Twitter hasn't exploited at all.

That's Brett Winton. He's the chief futurist at ARK Invest.

Think of all of the tweets that you've seen of people being like, oh, this airline, I was delayed. They didn't serve me well as a customer. Facebook, through WhatsApp, does $8 billion annualized in click-to-connect, in basically connecting customer service agents to customers. Twitter's a much more natural place for that kind of activity to occur. And so there's a big monetization opportunity there. And the undermonetization of Twitter actually has led to it being a harder network for people to use and enjoy. And I think that's a critical component here. As well, you can use kind of direct monetization and microtransactions and kind of like better filtering and curation to both improve monetization at the same time that you're improving the value of the platform itself.

Brett mocks Twitter's current blue check system for its subjectivity, calling it, quote, modern knighthood or something. He says paid verification could expand Twitter's base of verified users, clean up some of its issues with misinformation and spam. Brett says that cryptocurrency could play a key role in a Twitter transactions business. I noticed that Dogecoin, a parody crypto that Musk has called out before in tweets, has run up in recent days. It's unclear whether some people think it'll have a role, or some people think that other people will think that, or no one thinks that, but They think it's a funny joke at the moment, and that even though buying parity crypto for being funny doesn't make financial sense, it makes its own kind of sense, I guess, if you think that other people will trade a joke because they expect you to trade it. Do you follow me on that?

I'm not sure that I did. I got pretty lost early on, actually.

Where am I right now? Am I even doing a podcast right now? Did I fall asleep again eating my kids' Halloween candy?

Jackson! I'm here. You were talking about ARK's Twitter investment.

Of course I was. ARK is also a big Tesla bull. Why don't we take a quick break and come back with the bull and bear case for Tesla and some final thoughts on Musk and Twitter? That's next. I'm gonna grab a fun-sized Butterfinger.

That's worse than Musk Mystique. I think you should grab an Almond Joy.

Deal. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

At CLA, we're in your corner and on it. We coach tax strategies and Little League first base. We help you adopt AI data tools, and we adopt rescues named Buddy. We walk your factory floor and jog the local 5K, though sometimes we walk that too. Wherever you're coming from, we're right there with you. Wherever you're going, we'll get you there. CLA, CPAs, consultants, and advisors. Learn more at claconnect.com/withyou.

Welcome back. We were talking with Brett from Arc. ARK is best known for its flagship ARK Innovation ETF, which had an epic rise and fall on big bets on Tesla, crypto, and more. ARK held Twitter stock but sold much of it at an unlucky time before the Musk takeover. It has purchased a stake in Twitter as a private company under Musk through a new vehicle called ARK Innovation, which ordinary investors can buy through a trading platform of a fintech startup called Titan. Some Twitter investors were permitted to convert their stock to a share of the new Twitter under Musk, including company founder Jack Dorsey and an investment arm of the Saudi royal family. Now, we've had ARK founder Cathie Wood on this podcast before, and she is as bullish as they come on Tesla. So is Brett. Let's pick up there. If you're wondering whether Tesla is going to make it financially,, you might want to take a fresh look at its cash flow. Next year, Wall Street predicts that Tesla will bring in $14.6 billion in free cash, which would likely be more than Ford and GM combined. Of course, Tesla's stock market value of $680 billion reflects that and then some. Ford and GM together are valued at less than $110 billion. Your view of what's next for Tesla stock probably depends a lot on whether you view the company as a software platform with an insurmountable advantage, or just a carmaker, or something in between. Scott at NYU calls Tesla the most overvalued stock in the world.

I just have trouble understanding why this company is worth more than the rest of the auto industry combined. And then if you want to have a serious conversation with anyone around valuation, they pivot and say it's an energy company or it's a software company. No, it's not. It's wrapping steel around a motor and 4 things called a tire. It's an auto company. And you have everyone from Volkswagen to Porsche coming for them. And I think you're going to see for the first time, it's sort of Netflix. Remember Netflix from kind of 2008 to 2016, '17? It had just no competition. That's been Tesla, and that's about to change.

Scott says that if you believe that Musk is a genius, then he must be hugely important to Tesla, but he's been spending a lot of his time on Twitter. And he views Twitter as more than just a distraction. He says that Musk has increasingly been pushing to the political right with his tweets. That's fine in a long list of occupations, but it might be a problem for someone trying to sell cars to customers on the political left.

The ground zero for a Tesla buyer, it's a wealthy male Democrat. It's a guy in San Francisco who has done well but thinks of himself as socially responsible. For lack of a better word, You know, the limousine liberal is now the Tesla owner. And when he is becoming increasingly adopting a narrative that feels pretty far right, whether it's carrying the water of Xi or Putin, I mean, again, this is pulse marketing. I sold my Tesla, Jack. I just don't like the man. I don't like what he stands for. And you think, okay, there's now enough electric cars where I have a choice.

I wasn't able to get a response from Musk. Scott mentioned China's Xi and Russia's Putin. Musk has proposed a deal to end Russia's war in Ukraine that involves Ukraine accepting Russian sovereignty in Crimea and the UN overseeing a referendum on other land that Russia has annexed. Critics have called that conciliatory to Russia, in many cases with more colorful language. There was a similar proposal by Musk that China set up a Hong Kong-like special administrative zone for Taiwan, and it was similarly received. Maybe Musk is just trying to be a peacemaker, whether or not you agree with his proposals, but the occasional inflammatory and divisive tweets don't add any clarity. And it's unclear whether he just can't help himself or he's having fun or he thinks that those tweets serve some larger purpose. Not nearly everyone is bothered by Musk, of course.

I mean, I think he's a jarring person. I think that anyone who is not going to be offending some people is probably not— I mean, there's, there's no way to not offend anyone in a situation like this.

That's Laura Huang, who teaches entrepreneurship and management at Harvard Business School. She's optimistic about Musk's management of Twitter and says that Some of his tweets are just him testing ideas.

I truly think that he knows what he's doing and he's a master of A/B testing. And a lot of the comments he makes, I think, are essentially that. I think that he's A/B testing different things that he could be putting into place.

Let me give a Musk bull the last word, but before I do, let me make one last point. And it's not about politics or leadership. It's about interest rates. Let's not forget that they were near zero for the better part of a decade, which created ravenous demand for growth stocks with or without cash flows. Putting aside the genius and hard work of Musk and Netflix founder Reed Hastings, it helped that creditors didn't care much about cash burn rates for so many years because there was so much stock wealth to tap in a pinch. And that financing helped these companies outgrow the competition back when competition was thin, and now both are category leaders that are well over the hump financially. But Netflix has already fallen into a growth slump. We'll see what happens for Tesla, but growth and gains could be more challenging in a world where investors can get a few percent on their safe money and aren't quite as willing to bid growth stocks up to extreme highs. Now Forget about all of that. And let's hear from our bull, Brett from ARK.

We think that robotaxis will deliver $26 trillion in incremental GDP per year by 2030. And so measured against every innovation in history, it would, including the steam engine and, and the IT revolution, this would be the most macroeconomically impactful innovation ever kind of brought to bear on humanity. And we think Tesla's very likely to command, if not a majority, at least a plurality share of that market and be instrumental in actually bringing that to commercial fruition in a scalable way.

As you heard at the top of the episode, Brett views Musk's legacy as secure no matter what happens with Twitter, and that's based on his view of Tesla's future. But he also says that the Twitter purchase helps rather than hurts the outlook for Tesla?

I think that de-risking the odds of Elon Musk losing Twitter as a communications tool is itself extremely valuable to Tesla. There's a reason he thinks the network is undermonetized, and it's because it's massively valuable to him. And if that comms platform could be cut off from him because a joke was too off-color for some person that's just sitting there and serving as the arbiter of good taste, that would be incredibly damaging to not just Tesla— Tesla, SpaceX, Neuralink, all of his initiatives.

Thank you, Rohit, Laura, Scott, Brett, Chuck Norris, and thank all of you for listening. Jackson Cantrell is our producer. If you vote in the U.S., don't forget that Tuesday, November 8th, is Election Day. If anything I've said here has offended you, or if you haven't been offended enough, Or if you sniffed me and picked up a trace of something you didn't quite like, please feel free to misrepresent my views in the public forum of your choice and take extreme positions about my abilities and appeal. Just kidding. Let's all be nice to each other for a while and see where it takes us. See you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.