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Red ink, inflated user count, and a shelved outlook: Did Elon Musk bite off more than he can chew with Twitter?

April 28, 2022, 6:58 PM UTC

The true extent of the problems Elon Musk faces from his Twitter acquisition is starting to emerge, and it’s Tesla investors who are suffering. 

On Thursday, the social media platform reported a slew of bad news that suggests Musk has bigger issues than just cracking down on bots and guarding free speech. 

Twitter revealed it had swung to a first-quarter loss, warned that user totals had been accidentally overstated since 2019, and scrapped all guidance for the next two years, citing the Tesla CEO’s $44 billion deal to buy the company. 

“Given the pending acquisition of Twitter by Elon Musk, we will not be providing any forward-looking guidance and are withdrawing all previous provided goals and outlook,” it said. 

Increasingly critical of “woke” progressives, the centibillionaire has pitched the deal as a means of bringing free speech back to Twitter, which famously booted Donald Trump off its platform for inciting violence.

In true Musk fashion, he used a mathematical analogy on Wednesday to state that his goal is “to maximize the area under the curve of total human happiness, which means the ~80% of people in the middle.”

Conservatives have since been celebrating the deal, with Trump favorite Rep. Lauren Boebert (R.-Co.) tweeting Monday that Musk “now literally owns the libs.”

Loses money, burns through cash

Shares in Tesla sank as much as 7% on Thursday on fears that Musk’s ownership of Twitter will ultimately hurt the carmaker. That is because Musk plans to finance the takeover by borrowing against the value of his holdings in Tesla: Stock in the EV pioneer serves as collateral for his creditors in the Twitter deal. 

As a result, should Tesla stock fall far enough below key thresholds, he could find himself in breach of his loan terms. To prevent that, Musk would have to liquidate a portion of his Tesla stake.

While Tesla sank during a friendly market session on Thursday, shares in Twitter rose on its results. But not for the obvious reason—instead the stock now primarily functions as a barometer of investor confidence in the success of his $54.20-per-share bid. 

Twitter’s financials are notoriously poor when matched against other social media platforms like Meta’s Facebook, which has proven far more adept at translating user engagement into advertising revenue.

Case in point: Twitter reported a 35% increase in quarterly costs and expenses that easily exceeded a 16% gain in revenue to $1.2 billion. The was driven in part to a 60% surge in stock-based compensation.

It also burned through $35 million of cash in the first quarter, a reversal from the $210 million it generated a year earlier after investing in its business.

Twitter would have bled red ink in its latest quarter were it not for a windfall profit of $970 million from the sale of its MoPub subsidiary in January. On an operating basis, which excludes certain gains and expenses, it swung to a loss of $128 million after reporting income of $52 million a year earlier. 

Overstated user figures

Compounding problems, Twitter reported on Thursday that had it inadvertently overstated its last quarter’s monetizable daily active users (mDAU) by 1.9 million, and revised the count lower to 214.7 million. Past quarters back to 2019 were also affected.

The error was caused after Twitter let users link multiple accounts for convenient switching back and forth without the hassle of logging into and out of them each time. They were mistakenly all counted separately.

The longer-term outlook for the company is now also unclear given that its guidance was shelved on Thursday following the approval of Musk’s deal, which is expected to close before the year ends.

In February, Twitter had set the goal to at least double its annual revenue to $7.5 billion or more in 2023 from the $3.7 billion it generated in 2020. It also planned to reach a minimum of 315 million mDAUs.

The lone bright spot in the results was Twitter’s mDAU count gaining 16% gain year-on-year, as well as news that an internal review revealed fake or spam accounts may only make up fewer than 5% of its 229 million daily users.

Otherwise Musk will likely be alarmed. That might be one reason Twitter CEO Parag Agrawal posted a cryptic tweet after the board agreed to the offer.

“I took this job to change Twitter for the better,” he wrote on Wednesday, adding that he is proud of his team.

Investors don’t know whether that was a signal he is preparing to depart the company or simply meant as motivation for employees nervous about their future.

The company called off its usual quarterly earnings conference call on Thursday. Instead, Twitter said, any further detail will have to be gleaned from an upcoming regulatory filing.

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