Elon Musk is offering $54.20 a share for all of Twitter.
Al Drago/Bloomberg
Elon Musk is offering $54.20 a share for all of Twitter
—and you don’t need to work up a discounted cash flow analysis to see how he arrived at the price.
Starting from Twitter’s closing price of $45.85 on Wednesday, $54.20 is simply the lowest price that includes “420,” a favorite Musk reference and shout out to cannabis culture. It reportedly dates back to the early 1970s and a small group of California high school students who met to partake at 4:20 p.m. each afternoon.
You might recall a similar nod in the 2018 tweet that landed Musk in regulatory hot water: “Am considering taking Tesla private at $420. Funding secured.” This time, Musk announced his offer through a more traditional letter to Twitter’s board, which was published in a securities filing.
And funding in this case seems plenty secured. The offer works out to $43 billion, or $48 billion using a fully diluted share count, and Musk’s net worth recently topped $250 billion.
That leaves the question of why, and what comes next. In the offer letter, Musk calls free speech “a societal imperative for a functioning democracy,” and writes that Twitter “will neither thrive nor serve this societal imperative in its current form.” Break that into two parts: thrive and serve.
Twitter has been a stock market flop. It went public in 2013 at $26, and ended its first day of trading near $45. Before last week, when Musk’s share purchases were made public, it was trading at $39 and change.
But the company is far from a financial disaster. A new CEO has an ambitious plan to top $7.5 billion in revenue by 2023, a three-year doubling. Free cash flow is meager now, but bulls see it topping $1 billion by 2024.
For a back-of-the-envelope upside case, assume $10.5 billion in revenue by 2025, which is slightly above the current consensus estimate, and a free cash margin that is better than Twitter’s current trajectory of around 11% by 2024, but also well short of the estimated 21% that industry behemoth Meta Platforms (FB) is expected to clear next year. Call it 15%, and you can see Twitter approaching $1.6 billion in free cash flow by 2025, if you squint.
That means Musk is offering 30 times estimated 2025 free cash flow, which, for a company that can still grow revenues at high teens percentages, isn’t detached from reality. There are rosy assumptions built in here, including that Twitter will rekindle user growth and more fully cash in on its traffic. But the point is, Musk’s offer could pass for an act of capitalism, not just civic service.
BofA Securities recently had a $54 price target on Twitter. There’s no cannabis reference, but still.
As for what comes next, Twitter likely takes the deal or asks for more money. The company lacks a strong takeover defense, with no founder owning gobs of stock, and no supervoting shares. Musk in the filing calls his offer “best and final” and says that he’s “not playing the back and forth game.”
Management isn’t in a solid position to convince shareholders that it can unlock a higher value on its own. As for other potential bidders, social media players either lack the scale or would invite scorn from regulators. Salesforce CEO Marc Benioff considered buying Twitter years ago, but decided it wasn’t a good fit.
So assuming Cheech and Chong don’t team up with private equity for a $64.20 spoiler offer, Twitter could have a difficult time saying no. “We expect many twists and turns in the weeks ahead as Twitter and Musk walk down this marriage path,” wrote Wedbush Tesla analyst Dan Ives in a Thursday note to investors.
Assuming Twitter accepts the deal, Musk’s past tweets hold some clues to other coming changes. Twitter will surely get an edit button for tweets. There will likely be expanded services for paying Twitter Blue customers, including jumping to the front of the line for verified status, with its blue check mark. The company might turn all or part of its San Francisco headquarters into housing for the homeless.
And—this one is more of a hunch—a certain former president and Twitter outcast might already be warming up his tweeting thumbs.
Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
