Musk and Twitter finally got it right.
On Monday, Elon Musk will buy Twitter for $54.20 per share in cash. Musk's acquisition of Twitter is expected to close in 2022, and upon completion of the deal, Twitter will become a privately held company.
After the news was announced, Musk immediately sent a tweet to celebrate the success of the acquisition.
Source: Musk Tweet
Ben Alaimo, author of the value guru network, combed through the beginning and end of the acquisition, and he also put forward his personal views on the valuation of Twitter. The following is a full compilation of BenAlaimo published on the Value Guru Network. BenAlaimo holds shares in Twitter and plans to sell some of his positions within 72 hours.
Musk's acquisition of Twitter began and ended
Twitter conducted an IPO in 2013 for $41. Since then, despite significant growth in users and revenues, the stock price has been volatile. By early March 2022, Twitter shares slid to $33 per share, largely due to Twitter's failure to meet earnings expectations in the fourth quarter of 2021, Jack Dorsey's retirement as CEO, and rising interest rates.
Twitter's stock price and revenue status, the source of the value of the master Chinese station
On April 14, Elon Musk abruptly proposed to buy Twitter for an all-cash deal of $54.2 due to his personal dissatisfaction with the company, and Twitter's stock price soared by more than 20% after the news was announced. But because of the uncertainty of the acquisition, Twitter's stock price at the time was still below the proposed purchase price of $54.20.
Twitter's board has since announced a "poison pill program" designed to resist Musk's acquisition. "Poison Pill" is a shareholder rights strategy created in the 1980s to help companies protect themselves from hostile takeovers. "Poison Pill" allows existing shareholders (other than potential acquirers) to purchase additional shares at a discounted price when potential acquirers meet certain corporate ownership thresholds. Twitter's poison pill plan will allow shareholders (other than Musk) to buy one-thousandth of Twitter's preferred shares for each ordinary share they hold at an exercise price of $210. The value of each preferred stock will be twice the strike price ($420).
Graph source network
The purpose of this is to dilute Musk's holdings. He could go from owning 15 percent of the company to less than 2 percent. According to the Twitter announcement at the time, the poison pill was scheduled to expire on April 14, 2023.
Still, Twitter's attitude changed after Musk announced that he had "secured" $46.5 billion in funding. That would allow him to bypass Twitter's board and make acquisition requests directly to Twitter's shareholders. According to SEC documents, Musk said he would personally provide $21 billion in equity, $12.5 billion from margin loans.
Musk registered three new companies in Delaware last week, all with the words "X Holding Company" in their names, according to Bloomberg. Documents provided to the SEC say Musk plans to put money into one of the companies to fund the acquisition of Twitter.
Is Twitter undervalued?
Twitter's revenue growth has been slow since its listing. In 2021, however, the company saw a huge increase of 36 percent, with revenue jumping from $3.7 billion to $5.07 billion. Gross profit also jumped 39 percent to $3.3 billion. On the other hand, the company still generated a net loss of $221 million.
Image source: Value Master Chinese Station
Twitter has set ambitious targets for 2023, with plans to expand revenue to $7.5 billion and reach 315 million daily active users (DAUs). Their current DAU is 217 million, which has doubled since going public. I recognized this trend last year, where users, revenues, and profits are growing, but stock prices are falling and valuations are falling. That's when I got in.
To give Twitter a valuation, I cram recent financial data into my discounted cash flow model. I estimate that revenue will grow at a rate of 20% per year over the next five years. In addition, I predict that as the company better monetizes the platform, operating margins will improve significantly from 16% to 25% within six years.
Source: Value Master Network, the original text is in English, the editor has translated
Given these estimates, the fair value I get is $48 per share. The stock is now trading at a similar price, so it's fair in my eyes. That share price remains below musk's proposed $54.20 purchase price, suggesting that shareholders' interests will be protected if the company is acquired.
The Master Value Line also indicates that the stock is moderately undervalued at current levels.
Musk's acquisition of Twitter is clearly because of his personal dissatisfaction. He sees himself as having a "responsibility" to try to "save the company." That doesn't really fit the idea of buying Twitter at a fair value; he's willing to pay much more than the company's value to gain control. On a purely financial side, Twitter has seen significant revenue and margins grow over the past few years, but there is still a long way to go. The stock price is now a "fair valuation," but I expect a lot of volatility. I will keep a close eye on the news changes in the coming week and settle down when the stock price performs well.
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