Jack Dorsey is lavishing effusive praise––full of new-age rhapsodizing––on Elon Musk for his surprise deal to buy Twitter. Since the Twitter board accepted the Tesla CEO’s $44 billion offer on April 25, Dorsey’s issued a barrage of tweets that laud Musk for “extending the light of consciousness” by making Twitter “a public good not a company” that’s “maximally trusted and broadly inclusive.” But the most telling comments from Dorsey, who co-founded Twitter in 2006 and served as CEO until last November, suggest deep doubts about its financial future. He labeled his record in operating the social media giant “my biggest regret,” expressed relief that Musk is taking his brainchild “back from Wall Street,” where investors are rapidly souring on Twitter’s prospects. Perhaps most revealing was his nod to current CEO Parag Agarwal for “getting the company out of an impossible situation,” though Dorsey didn’t specify what mess he was talking about.
Dorsey, however, may feel the greatest gratitude to Musk for the gift he didn’t mention. His crypto-brother is delivering Dorsey a gigantic, hundreds-of-millions-from heaven, windfall-from-nowhere that absolutely no other buyer watching Twitter’s economics would remotely have proffered. According to the just-released proxy, Dorsey owns 18,042,428 Twitter shares, or 2.4% of the total. At the April 1 market close, just before Musk disclosed his 9% holding that set the deal in motion, Twitter was selling at $39.31, putting Dorsey’s holdings at $709 million. Musk’s paying a rich, 38% premium at $54.20, all in cash, valuing Dorsey’s position to $978 million. Overnight, Dorsey will bag a $270 million bonanza courtesy of what could be just about the only multi-billion dollar, ideologically-motivated, not-commercial takeover in history.
Twitter is a total mess, meaning Musk may have made Dorsey much more than $300 million
Musk may view himself as the architect who can turn Twitter into a cathedral for free expression. But as a business, it’s a crumbling edifice with leaking plumbing and faulty wiring that likely needs a complete rebuild just to survive. In the past four years, assets have doubled to $14 billion, but Twitter generates no more cash from operations than before it added that extra $7 billion in capital. Since 2018, its free cash from has careened from a positive $856 million to a deficit of 379 million for 2021. The growth in its customer base is flagging. From the start of 2019 to mid-2021, its “monetizable active users” swelled by an average of 10 million every three months. But in the 18 months ended in December, the pace slowed by half. Meanwhile, expenses exploded. Twitter blamed the takeoff on heavy spending for infrastructure and personnel needed propel the next wave of expansion.
Wall Street has no confidence such a wave is coming. From July of last year until the Musk bailout appeared, Twitter’s shares fell 50%. And its long-term performance for investors is one of the worst in the annals of Big Tech. Since its IPO in 2013, Twitter’s provided a cumulative return to shareholders of minus 12.4%, versus a total gain of 206% for the S&P 500.
Despite its poor operating numbers, Twitter remained a poster child for an overpriced glamour stock when Musk arrived. It’s hard to justify its pre-Musk market cap of $32 billion, given its negative earnings and cash flow. In fact, David Trainer, CEO of investment research firm New Constructs believes that based on fundamentals, Twitter’s worth between $10 and $15 a share, at best less than one-third of what Musk is paying. “Twitter is a glorified chat room,” Trainer told Fortune. “It hasn’t evolved. To get more profitable, it would need to run far more ads, and a blizzard of ads would be too intrusive for its customers, who would leave.”
Let’s posit that sans Musk, Twitter was heading for $15. In that case, the world’s richest person is giving Dorsey not $270 million, but $700 million more than Twitter’s true value. Since Musk is taking Twitter private, it will be hard to tell if indeed its worth as a business falls that low. But that’s the direction.
While Dorsey basks in his good fortune, Musk’s net worth is taking a big hit
It’s likely Musk will lose lots of money on Twitter. He hasn’t provided a blueprint for cutting costs, swelling the customer base, or otherwise improving its finances. He could get stuck funding big operating losses from his own pocket. But the greatest damage from his Twitter adventure appears to be how it’s undermining investors’ confidence that Musk can achieve the near-miracles needed to make Tesla speed fast enough to justify a valuation of well over $1 trillion, and growing from there. When Musk announced his stake in Twitter at the start of April, Tesla traded at $1,080. By the market close on April 26, it had dropped by 19% to $876, erasing $210 billion in market cap.
Jack Dorsey and Elon Musk are both reveling over Musk’s grand gesture in the name of public service. The difference is that Musk’s “righteous works” are handing Dorsey a king’s ransom, while endangering Musk’s visionary commercial ventures, and shrinking the wonder they built, the world’s biggest fortune.
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