Some are outraged that Musk bought Twitter. Some are happy. I don’t have a camp. I can care less. Well I do care a little bit, in the sense of how much influence it has on people and Twitter is a great vehicle for disinformation, hate speech and conspiracies theories and the real-world consequences that comes with it. Of course that conversation is not limited to Twitter. And I’m not going to get into it because it comes with the rabbit hole of cancel culture, politics, freedom of speech, conspiracy theories…
Q3 2022 hedge fund letters, conferences and more
After identifying himself as a free speech absolutist Musk hasn’t announced how he would patrol Twitter but it’s a one man show now. He’s the only board member and CEO. Twitter is his personal asset. He can do as he wishes (not exactly true, he took on a lot of debt that needs to service and he has other shareholders, so he’s going to need advertisers and they won’t spend if Twitter is the wild west.)
I like Twitter, but it’s a crazy place. The amount of trolls, psychos, and bots far outweigh the number of “real” people (probably not but it just feels that way). My take is that the less time you are on it, or any of these social media platforms, the better.
Back to Twitter. It will be interesting to see how Musk tries to monetize his investment. Musk paid $44b for Twitter. And he way overpaid with his $54.20 per share bid (a play on when he said he was taking Tesla private at $420). What seems to have started as a joke became reality when he couldn’t get out of the purchase agreement. How do I know he overpaid? He paid 8x forward revenue. Compared to 2.2x for Facebook (I know it’s now called Meta) and 3.3x for Snap. Put another way, Musk is paying more than double the current valuation of Twitter’s main rivals. At a sales multiple in line with Facebook and Snap, Musk would be paying more like $24 per share for Twitter, and I would argue that’s still too much. Generally, if you are going to pay 8x sales, it needs a hyper growth profile and that’s not Twitter. Twitter is not a startup. It was founded in 2006 and after all these years it’s barely profitable and it’s not growing.
Musk has a lot of work to do to make this investment work. He paid too much and took on debt. Now he has to service that debt which some estimate to be $1 billion in interest expenses. Musk can cut costs to boost cash flow and profit. He’s already doing that by firing 50% of the workforce. Cutting fat off is a good thing, but shaving costs to the bone might hurt the product, revenue, and growth potential. And he has to grow revenues a lot to make this investment work.
Musk said Twitter will charge $8 monthly to Twitter users who want a blue tick by their name indicating a verified account. Like many things Musk says, I can’t tell if he’s joking, trolling, or being serious. It’s probably a combination of the three. “Power to the people! Blue for $8/month,” Musk said on Twitter. Maybe I would have paid a one-time upfront fee just for verification. That would wipe out most bots. But $8 every month? Do people care that much about a blue tick? And only have to suffer through half as many ads as those of us who won’t be paying.
The whole point of the blue tick was to separate authentic people from fake accounts. It brings credibility to your platform. So you know you are getting your opinions from the real Kim Kardashian.
I also get the feeling that by charging money for the blue tick he’s making his bot problem my problem to fix. “Hey we have too many bots, so pay up to clean up the place.”
The new subscription might bring in new revenues Musk needs. I think Twitter has about 240 million daily users. If you get 5% of users to sign up, that’s 12m subscribers. 12m * $96/yr = $1.15 billion in new revenue. That covers your estimated interest expenses.
People spend $8 on stupid things all the time, like for a cup of coffee. LinkedIn charges $29.99 per month for its premium subscription. Twitter itself has its own Twitter Blue subscription service, for $4.99/month and I have no clue what it does. I know Musk has big Twitter bills to pay and I wouldn’t bet against Musk. He’s the guy building EVs and sending rockets to space. So maybe there’s some genie to his madness.
From an investor’s point of view, in the Twitter value chain, all the value goes to the consumer. That’s why Twitter never really figured out how to make money. It’s hard to extract anything out of it when all the value goes to the consumer. But some companies have figured it out, like Costco and Amazon. These companies have thrived in giving as much value as possible to the consumer. If you take Costco, all of their money is in that membership card. Their margins are razor thin on the retail side. It’s a similar situation with Amazon with their Prime membership. I guess by now you realize they don’t make money off books. They both put the consumer first and worship him. As for Twitter, it does have the potential to be the best platform.
Twitter is a social network. The more people, the better. Each additional user adds value to the existing user. The worst thing for Twitter is that the network effect collapses–because no one wants to be at a party where other people aren’t there. You don’t have a social network if there’s no people. Remember Google Plus? Nice place, but it was a ghost town.
I said this in a previous post. I’m not a Musk fanboy. I’m not a Musk Hater. I’m fascinated with Elon Musk, the person, the character. Just like how historians study people from the past. I’m also envious of his schedule. He’s the CEO of way too many important massive companies (Tesla, SpaceX, Twitter, Boring Company, Neurolink and I’m missing some). He has 9 or 10 kids. And he’s very active on Twitter. Look, I don’t even have time to read my emails.
I had a moment a couple years ago. I was trying to put some clothes on my toddler and she wasn’t having it. And you know as a parent, when a kid says no, it’s a hard no, and it’s impossible to do anything. It was at the same moment Musk was launching rockets and landing them. And I couldn’t even get my kid to get dressed. I remember asking myself “how does he do it?”
I think the playbook here is to try to “fix” Twitter, generate revenues, pay down some debt, and turn it into some superapp that does everything like they have in Asia with WeChat. And once Twitter is all shiny again, make it public as some extravagant valuation.
