Elon Musk’s Twitter fans see value that analysts don’t

Just 10 of the 42 brokerages tracked by Bloomberg that cover Twitter's stock recommend buying it

Buyers are betting Elon Musk can jumpstart Twitter by virtue of his clout as the biggest shareholder and as an influential user on the company’s platform, where he has 80.4 million followers.

Elon Musk and an army of individual investors are now going head-to-head with Wall Street analysts in a contest over Twitter. 

Retail investors helped fuel record trading volume for Twitter, with more than 260 million shares changing hands earlier this week, after Mr Musk disclosed a 9.2% stake in the social-media company. Twitter ranked as the most purchased stock by Fidelity Investments customers as the stock had its biggest rally since the day the company went public in 2013.

Analysts have been sceptical: They’ve slashed their aggregate price target by more than a third since October and just 10 of the 42 brokerages tracked by Bloomberg that cover the stock recommend buying it. The shares have tumbled from their 2021 record as investors baulked at a combination of a high valuation and potentially disappointing user growth.

Buyers are betting the Tesla CEO can jumpstart Twitter by virtue of his clout as the biggest shareholder and as an influential user on the company’s platform, where he has 80.4 million followers. For now, though, they’re buying on faith.

“We need to know how active he’s going to be,” Alec Young, macro investment strategist at quantitative-research firm Mapsignals, said.

“Does he have a vision for the company? We’re not aware of that right now, and how active he is will make a huge difference for the stock. The stock has been sort of left for dead and analysts are lukewarm on it,” the strategist said. 

Before Mr Musk’s ownership disclosure, Twitter had tumbled over the past year as Covid-19 lockdowns eased and investors prepared for the end of easy-money policies from the US Federal Reserve.

The 27% one-day surge is “a potential over-reaction” given that it’s not clear why Mr Musk made his investment, the stock is expensive and investors have yet to see substantial progress toward Twitter’s revenue and user targets, Brent Thill, an analyst at Jefferies, wrote in a note. 

Twitter shares sat at 50 times the profit projected over the next 12 months, more expensive than about 97% of the S&P 500 Index including Amazon and Nvidia.

Activist investors usually step in when they see a company as undervalued and seek changes that will boost the share price, brandishing the ultimate threat of a proxy fight for control of the board. 

Mr Musk disclosed his stake using a form for investors who don’t plan to seek a change of control, and in any case the stock isn’t cheap, so he doesn’t seem to be following the standard activist playbook.

But nothing stops him from sharing his opinions about how Twitter can be improved, and he’s already doing that. He’s polled users on whether they want a button that would allow editing of tweets, and Twitter chief executive Parag Agrawal responded by calling it important and urging users to “vote carefully.”

Bloomberg