Twitter – X marks the spot?

X is the only place to go.

• Much has been made of Mr Musk’s plans to create a super app called ‘X’ with Twitter as its starting point, but the reality of numbers demonstrates that this is probably the only way that any money will be made from acquiring Twitter for $44bn.
• Twitter is what RFM refers to as a microblogging platform and in this niche, it is untroubled by serious competition and the company is pretty good at monetising the traffic it has.
• The problem is that within the spectrum of activities that users engage with on a daily basis, microblogging takes up only a small fraction of the total time spent with a smartphone.
• This means that the total monetisation opportunity is a small portion of the total possible which is why companies like Meta and Google can generate far more revenues from users than Twitter can in its present state.
• Furthermore, Twitter’s user base is much smaller and is unlikely with its current service to ever get to the size of the larger digital ecosystems which further limits its ability to generate revenue.
• This is not a new state of affairs and has been the main reason why the shares have pretty much gone sideways since it went public in 2013.
• At a price of $44bn, Mr Musk is paying roughly 10x EV/revenues for a company that is not far off being ex-growth, makes a small profit and generates very little cash.
• Consequently, it is not hard to argue that he has massively overpaid for the company which I would value in this climate at somewhere around $17 per share.
• Mr Musk doesn’t seem to care much about this as his main motivation for buying Twitter in the first place appeared to be ideological rather than commercial (see here)
• However, his backers and his creditors will be looking to earn a return from this transaction and so Mr Musk needs to achieve that which Twitter’s management has failed to deliver ever since it went public.
• The way to deliver this return is simple in concept but fiendishly difficult in practice which is to broaden Twitter’s appeal beyond just microblogging.
• If Twitter can offer more than microblogging with for example a chat service like WhatsApp or a social network service like Instagram or TikTok or a payment system like WeChat Pay, then users will spend more time within Twitter’s services and more users are likely to sign up.
• This would also mean that Twitter would have a better understanding of what it is that its users do as well as more opportunities to send them advertisements.
• This is how revenues could get much larger and this is exactly what Mr Musk is hoping to achieve with super app ‘X’ which seems to be inspired by WeChat, the app where Chinese users go to do pretty much anything.
• Twitter has tried this before with forays into different types of video, but all of them have come to nothing, leaving Twitter now exactly where it was 10 years ago in terms of service.
• Consequently, Mr Musk needs to succeed where all of his predecessors have failed which, given that this appears not to be his main motivation for buying the company, looks like a tall order.
• Hence, I expect that not an awful lot is going to change at Twitter although we will probably see one or two half-hearted attempts.
• Consequently, the real winners from this transaction are the current shareholders who now look much more likely to get their $54.20 than I ever thought possible.
• The shares currently offer the potential of 10% further upside if the deal goes through and 65% downside if it fails, meaning that holding out for the last 10% makes very little investing sense.
• I would have sold out ages ago if I had had the shares (which I did not).