Should I invest in Twitter?

If any social network has played a part in changing the way people communicate with each other over the past 15 years, it is Twitter. By limiting its users to 140 and then 280 characters, the company has completely redefined the way people express themselves online today.

Twitter is often presented as the favourite social network of journalists and politicians and also has its stars, such as Elon Musk (we'll get back to him later on). Yet, the little blue bird also faces many critics and is often accused of participating in the propagation of fake news or hate speech.

Despite the criticism, Twitter is now a must-have, and the verb "to tweet" has entered the mainstream. But does this mean that the company is doing well and that it is worth investing in? Let's take a closer look.

How Twitter's share price is evolving

Twitter's share price has always been very volatile. Since it IPOed, its share price has seen many ups and downs. If you had invested in Twitter when the company entered the financial markets at the end of 2013, you wouldn't have made that much money. At the time of writing, Twitter's share price has only risen by 11% since its launch. This means that if you had invested €1,000 in it at the time, it would be worth €1,110 today. This is far below the performance of the S&P 500, the US benchmark, which has risen by around 150% in the same period.

While Twitter's share price has been particularly volatile since the company's IPO, this is also the case if we focus on a more recent period. Since the start of the coronavirus pandemic two years ago, Twitter's share price has also seen its ups and downs. However, over this period, the company has performed slightly better than the average of the companies in the Nasdaq Composite, the benchmark index for US technology stocks. If you had invested €1,000 in Twitter in April 2020, it would be worth around €2,000 at the time of writing, slightly more than the €1,885 you would have earned by investing in an ETF tracking the Nasdaq Composite.

So, what are the reasons for the high volatility of Twitter's share price? To try and find out, let's dive into the company's accounts.

How Twitter makes money

The company was founded in 2007, but it took a long time to make its first profit. In fact, it was not until 2018, eleven years after its creation, that it made a profit for the first time.

Despite steadily growing revenues since 2017, the company has only managed to turn a profit twice: in 2018 and 2019. Since then, its accounts have remained in the red, but for very different reasons each year.

The losses in 2020 can be attributed to the Covid-19 pandemic, which has impacted the social network's advertising revenues. In fact, the social network earns money almost exclusively from ads it sells on its network to advertisers, whether via Promoted Ads, Twitter Amplify, Follower Ads, or Twitter Takeover.

In 2021, Twitter generated $4.5 billion in advertising revenue, up over 40% from the previous year. This represented almost 90% of its revenue. Despite this considerable increase, Twitter still lost money in 2021. But this loss is actually related to a one-off net charge of $766 million. This follows an $809.5 million out-of-court settlement between Twitter and shareholders of the platform. They accused Twitter of misleading investors about the growth of its user base and the number of active users.

An extremely volatile share price, rising revenues, but variable profitability. This should not be an indicator of confidence in the company, right? And yet Twitter makes people want to buy it, and some are even fighting to do so.

Musk, the future of Twitter?

It's April 2, 2022. On that day, the world learns that Elon Musk has just taken a 9.2% stake in Twitter, making him the company's largest single investor. Less than two weeks later, the Tesla boss will make a $43 billion offer to buy the company.

Will Elon Musk's takeover succeed? Not sure. The proposed price ($54.20 in reference to 420, you got it?) is lower than the record $77 per share reached fourteen months ago. Saudi Prince Al-Walid Ben Talal Al Saud, one of Twitter's main shareholders, has already rejected the offer as insufficient. Moreover, Musk, whose fortune is based mainly on the Tesla shares he owns and who does not pay himself a salary, does not have enough cash to buy Twitter. He will have to sell Tesla shares or take out a huge loan to do so.

The deal could be even more expensive as Twitter has decided to fight Musk's takeover attempt by adopting the so-called "poison pill" technique: a legal and financial tool that gives certain existing shareholders a regime of specific rights. These rights can allow them to increase their stake in the company at a reduced price if a buyer tries to take control of the company. In the case of Twitter, the poison pill will be triggered if an investor exceeds 15% of the company's shares. Suppose Musk buys enough shares to reach the 15% threshold. In that case, all other shareholders of Twitter will be able to buy shares at a reduced price, which would greatly increase the price the entrepreneur would have to pay to fully acquire the social network.

Does this mean that Twitter will not fall into Musk's hands? Not necessarily. A 'poison pill' can also be used as a negotiating technique to raise the takeover price of a company in the event of a hostile takeover.

So what does this mean for those interested in investing in Twitter today? Even more today than before in the company's history, its future appears to be very unclear. Indeed, Twitter may not be listed in the coming months if Musk takes over. However, at the time of writing, the company'sshare price has risen by almost 20% since the announcement that the Tesla founder has taken a stake in Twitter. Financial analysts are quite divided, although most give the company's stock a "Hold" rating, according to a compilation by Refinitiv.

As always, the final decision is yours alone.

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