Twitter Stock’s Fall Isn’t Over, Analysts Warn

Now that Elon Musk has decided he would rather not own Twitter, Wall Street is scrambling to think through what happens from here, and what the company might be worth on a stand-alone basis.

Twitter shares plunged 11.3% on the news Monday, but still seemed priced to reflect the possibility a deal will still happen at a lower price. If there is no sale, Twitter stock could tumble another 30% from here, analysts say.

In a letter disclosed in an SEC filing late Friday afternoon, attorneys for Musk said that he is terminating his $54.20-a-share deal to buy Twitter (ticker: TWTR), asserting that the company breached the terms of their agreement by not fully disclosing details relating to the use of fake accounts on the site. Twitter denies withholding this information, and said that it will file suit to force Musk to complete the deal.

Twitter closed Monday at $32.65 a share, well below the bid price, but arguably still well above the company’s intrinsic value. Most Street analysts seem to think that Twitter as an independent company with no acquisition potential based on the current outlook would trade in the $25 to $30 a share range.

Keep in mind that 2022 has been a terrible year for social media stocks. While Twitter is off 23% for the year to date, that is a relatively modest decline compared with Pinterest (PINS), off 49%; Meta (META), off 51%; and Snap (SNAP), down 70%.

MKM Partners analyst Rohit Kulkarni notes that Snap, Pinterest and Meta are all trading at all-time low multiples of forward Ebitda, or earnings before interest, taxes, depreciation and amortization. Twitter, he notes, is trading at about 16 times, but troughed at 12 times at the March 2020 low, and previously dropped to 9 times in April 2016. Put a low-teens multiple of Ebitda on the stock, he says, and the shares would be in the $24 to $26 range. Other analysts draw the same conclusion.

There are differences of opinion on the Street about what happens from here, but they mostly fall into two camps.

A few analysts think the deal gets renegotiated at a lower price. Benchmark analyst Mark Zgutowicz asserts that US$37 would be a “good compromise,” and that a deal at that level would be in the best interest of shareholders. “We suspect neither party wants a long, drawn-out legal battle, and Twitter’s board must contemplate the potential harm to its employee and shareholder base of any additional internal data exposed in litigation. We do believe Elon Musk ultimately wants to run Twitter and believe the best course of action for both parties is a compromise.”

Mizuho analyst James Lee likewise asserts that “the most reasonable scenario” would be to negotiate a deal at a lower price, or a settlement that allows Musk to walk away, avoiding protracted litigation.

Others think Twitter is going to have to go it alone: CFRA analyst Angelo Zinino agrees that a settlement or revised offer would be the best-case scenario for both sides, but he also thinks Twitter would have a hard time accepting a price reduction large enough to satisfy Musk.

His view that the most likely scenario is that Twitter stays independent. But Zinino warns that the company faces a difficult advertising market for the second half and into 2023, and he also sees risk that the company could see a huge talent drain as doubts grow about the company’s future.

“With Musk officially walking away from the deal, we think Twitter’s business prospects and stock valuation are in a precarious situation,” Zinino writes. “We see risks from an uncertain advertising market, a damaged employee base, and concerns about the status of fake accounts/strategic direction as a stand-alone company.”

Wedbush analyst Dan Ives says the situation is a “nightmare” for Twitter, that results in an “Everest-like” uphill climb “to navigate the myriad of challenges ahead,” including employee turnover, advertising headwinds, and investor worries around the fake account issues, among other things.

JMP Securities analyst Andrew Boone asserts that his gut reaction is that Musk no longer wants to own Twitter, with macro conditions worsening and growing employee attrition. Boone writes in a research note that he “increasingly” thinks Twitter’s future will be to remain independent.

Other scenarios are possible. Conceivably, with the stock down sharply, an alternative bidder could emerge, though none has surfaced so far, and there are no obvious buyers.

It’s also possible that negotiations fail, resulting in protracted litigation, in which either Musk wins, and walks away from the deal, or Musk loses, and gets stuck paying the original price. In either litigation scenario, you can imagine endless appeals that could drag on for eons.

Australia is in the midst of a ‘baby recession’ with preliminary estimates showing the number of births in 2023 fell by more than four percent to the lowest level since 2006, according to KPMG. The consultancy firm says this reflects the impact of cost-of-living pressures on the feasibility of younger Australians starting a family.

KPMG estimates that 289,100 babies were born in 2023. This compares to 300,684 babies in 2022 and 309,996 in 2021, according to the Australian Bureau of Statistics (ABS). KPMG urban economist Terry Rawnsley said weak economic growth often leads to a reduced number of births. In 2023, ABS data shows gross domestic product (GDP) fell to 1.5 percent. Despite the population growing by 2.5 percent in 2023, GDP on a per capita basis went into negative territory, down one percent over the 12 months.

“Birth rates provide insight into long-term population growth as well as the current confidence of Australian families,” said Mr Rawnsley. “We haven’t seen such a sharp drop in births in Australia since the period of economic stagflation in the 1970s, which coincided with the initial widespread adoption of the contraceptive pill.”

Mr Rawnsley said many Australian couples delayed starting a family while the pandemic played out in 2020. The number of births fell from 305,832 in 2019 to 294,369 in 2020. Then in 2021, strong employment and vast amounts of stimulus money, along with high household savings due to lockdowns, gave couples better financial means to have a baby. This led to a rebound in births.

However, the re-opening of the global economy in 2022 led to soaring inflation. By the start of 2023, the Australian consumer price index (CPI) had risen to its highest level since 1990 at 7.8 percent per annum. By that stage, the Reserve Bank had already commenced an aggressive rate-hiking strategy to fight inflation and had raised the cash rate every month between May and December 2022.

Five more rate hikes during 2023 put further pressure on couples with mortgages and put the brakes on family formation. “This combination of the pandemic and rapid economic changes explains the spike and subsequent sharp decline in birth rates we have observed over the past four years,” Mr Rawnsley said.

The impact of high costs of living on couples’ decision to have a baby is highlighted in births data for the capital cities. KPMG estimates there were 60,860 births in Sydney in 2023, down 8.6 percent from 2019. There were 56,270 births in Melbourne, down 7.3 percent. In Perth, there were 25,020 births, down 6 percent, while in Brisbane there were 30,250 births, down 4.3 percent. Canberra was the only capital city where there was no fall in the number of births in 2023 compared to 2019.

“CPI growth in Canberra has been slightly subdued compared to that in other major cities, and the economic outlook has remained strong,” Mr Rawnsley said. “This means families have not been hurting as much as those in other capital cities, and in turn, we’ve seen a stabilisation of births in the ACT.”

Twitter Stock’s Fall Isn’t Over, Analysts Warn

How much more could it tumble?

Continued stagflation and cost of living pressures are causing couples to think twice about starting a family, new data has revealed, with long term impacts expected