The drama over Twitter, Inc.’s (TWTR) acquisition finally ended after SpaceX founder Elon Musk agreed to buy the company for $54.20 a share. In a regulatory filing on October 4, Elon notified TWTR of his intent to go ahead with the initial agreed-upon deal to acquire the company and take it private.
The two parties were scheduled to go to trial on October 17, after TWTR had dragged the Tesla CEO to court after he informed the company of his intention to terminate the agreement in July.
Musk had backed out of the deal after stating that TWTR had failed to disclose the number of bots and spam accounts on its platform. He and his lawyers claimed that the company was misleading investors by misstating the number of bots on its platform by providing false numbers in its corporate filings with the SEC.
On July 12, 2022, TWTR filed a lawsuit against Musk, as his decision to back out of the deal had led to its stock price and sentiment tumbling. In the lawsuit, TWTR argued that having signed a binding agreement, he could not abandon it.
Meanwhile, TWTR is facing allegations of “extreme, egregious deficiencies by Twitter” related to privacy, security, and content moderation. The complaints were filed with the SEC by nonprofit law firm Whistleblower Aid, representing TWTR’s former head of security, Peiter ”Mudge” Zatko.
Although the Delaware court dismissed Musk’s request to delay the October 17 trial, it included the whistleblowers’ allegation in Musk’s counterclaim against TWTR.
TWTR missed its revenue and earnings estimates in the last reported quarter. TWTR’s revenue came in 12% below consensus estimates, while it reported an adjusted loss per share of $0.08, compared to analyst estimates of $0.14.
TWTR’s stock has gained 16.5% in price year-to-date but has declined 19% over the past year to close the last trading session at $50.34.
Here’s what could influence TWTR’s performance in the upcoming months:
Weak Financials
TWTR’s revenue declined 1.1% year-over-year to $1.17 billion for the second quarter ended June 30, 2022. The company’s non-GAAP net loss came in at $57.72 million, compared to a non-GAAP net income of $174.51 million.
Also, its non-GAAP loss per share came in at $0.08, compared to a non-GAAP EPS of $0.20. In addition, its adjusted EBITDA declined 67.5% year-over-year to $111.70 million.
Mixed Analyst Estimates
Analysts expect TWTR’s EPS for fiscal 2022 to increase 425.9% year-over-year to $1.05. Its EPS for fiscal 2023 is expected to decline 23.6% year-over-year to $0.80. Its revenues for fiscal 2022 and 2023 are expected to increase 4.5% and 16% year-over-year to $5.31 billion and $6.15 billion, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, TWTR’s 47.86x is 254.7% higher than the 13.49x industry average. Likewise, its 7.32x forward EV/S is 286.3% higher than the 1.9x industry average. And the stock’s 6.17x forward P/B is 256.5% higher than the 1.73x industry average.
Mixed Profitability
TWTR’s trailing-12-month net income margin is negative compared to the 5.73% industry average. Likewise, its trailing-12-month EBIT margin is negative compared to the 9.36% industry average.
On the other hand, its 60.84% trailing-12-month gross profit margin is 20.4% higher than the industry average of 50.52%. In addition, its 16.62% trailing-12-month Capex/Sales is significantly higher than the industry average of 4.27%.
POWR Ratings Reflect Uncertainty
TWTR has an overall rating of D, equating to Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. TWTR has a D grade for Value, consistent with its stretched valuation.
In addition, it has a C grade for Quality, in sync with its mixed profitability.
TWTR is ranked #45 out of 63 stocks in the F-rated Internet industry. Click here to access TWTR’s ratings for Growth, Momentum, Stability, Sentiment, and Quality.
Bottom Line
After much drama over the last few months, Elon Musk notified TWTR of his intent to buy the company at the previously agreed-upon price. The judge from the Delaware Chancery Court ruled that Musk has to close the acquisition by October 28 to avoid trial. It appears to be a good deal for shareholders.
However, given TWTR’s weak financials and stretched valuation, it may not be a good choice for fresh investors.
How Does Twitter, Inc. (TWTR) Stack Up Against its Peers?
While TWTR has an overall POWR Rating of D, you might want to consider investing in the following Internet stocks with a B (Buy) rating: trivago N.V. (TRVG), Yelp Inc. (YELP), and Travelzoo (TZOO).
TWTR shares were trading at $50.71 per share on Friday afternoon, up $0.37 (+0.74%). Year-to-date, TWTR has gained 17.33%, versus a -23.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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