Is Twitter Too Big To Fail? Is Elon Musk?

Date: 4/4/2022
Author: Mr. X

The hyperbolic prophecies being made about the future of Twitter and Elon Musk’s plans remind me of a scene from The Dark Knight Rises. Two stockbrokers are debating what it means for Wayne Enterprises now that Bruce Wayne has mysteriously returned.

Broker #1: Wayne coming back is change. Change is either good or bad. I vote bad.

Broker #2: On what basis?

Broker #1: I flipped a coin.

One can’t help but think that was driving much of the speculative frenzy surrounding Twitter (TWTR). After Elon Musk disclosed that he was the single largest shareholder and news broke that he had been invited to the company’s board, the stock jumped from just over $39 to a high of over $52. That sounds impressive, especially when you consider the stock’s staggering decline. Less than a year ago, it was over $73 a share.

Twitter is a rare company because (to use Silicon Valley slang) it’s a massive disrupter that remains difficult to monetize. One can’t overemphasize Twitter’s influence on our culture and government. There’s no way Donald J. Trump becomes President of the United States if there’s no Twitter. There’s no way the American conservative movement starts rethinking its attitude towards Big Tech without Twitter banning him from the platform.

Twitter’s social impact may even greater than Tesla, Google, or Meta Platforms (Facebook). Think of the vast social movements that have been set in motion through Twitter and it’s ability to direct the masses in an almost coordinated fashion. It determines what is news and what is not. That power is priceless.

Would the murder of George Floyd have turned into a movement without Twitter? Would COVID-19 have been so divisive? Would the West’s support for Ukraine be so monolithic? I’d argue Twitter is far more influential than Facebook, Instagram, or TikTok because its a platform policymakers and journalists (but I repeat myself) engage with almost constantly.

However, because of this power, Twitter has become almost an arm of the government. That may sound overblown, but the deplatforming of the President of the United States raised fundamental questions about whether there is a real line between “public” and “private” entities. Twitter is used for official government communications and silencing a head of state raises real questions about who is in charge. During the COVID-19 pandemic, the federal government made judgments on what constituted truth or “misinformation,” even as the situation rapidly developed and changed. This required social media platforms to play along.

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The war in Ukraine is also leading governments to adopt a firm line on what is “truth” or what is a Russian scheme. If you thought it was confusing keeping track of official narratives during the COVID-19 pandemic, try keeping track of events amidst the fog of war.

Twitter diplomacy has replaced shuttle diplomacy, as political leaders and entire governments tweet out carefully crafted messages designed to manipulate global public opinion. Russia and China’s development of their own social media networks seem like a prerequisite for sovereignty in any meaningful sense.

Twitter has also transformed investing. Though Reddit, Telegram, and Discord also played a part, it’s difficult to imagine the populist uprising of retail traders surrounding stocks like GameStop (GME) and AMC without Twitter. Rogue Investing Daily’s Model Portfolio scored a win of more than 457% in less than a month on AMC between May and June 2021. At the same time, consistently relying on massive trading swings encouraged by social media campaigns is like trying to navigate a sailboat by deliberately traveling into a hurricane and hoping for the best. There has to be more at work than just online chatter.

We should also question some of the narratives surrounding this trader uprisings. However psychologically satisfying it might be to stick it to certain hedge funds (“hedgies”) I promise the big fish are making money off this just like they do everything else. Most populist movements are, after all, simply the public face of an elite faction’s drive for more power and money.

Twitter is also completely open for pump and dump schemes. Elon Musk has been accused of this with his tweets for certain cryptocurrencies, notably Dogecoin. Yet he’s just one example of a much larger trend. On countless communications platforms, groups are discussing which stocks to buy or sell and the potential for market manipulation is vast.

If anything, stocks are probably not as affected by artificial demand as other assets. That doesn’t mean the impact is small, it means that Twitter is actually bigger than the stock market in some respects. Could you imagine the “Bored Ape” NFTs selling for hundreds of thousands of dollars without Twitter? By the way, Coinbase (COIN) is making a film trilogy about it. That’s an entire economic ecosystem that doesn’t exist without Twitter. And short of banning free speech entirely, it’s hard to see how something like this can be controlled. The logical conclusion is that Twitter is going to be supervised and viewed as something akin to a utility.

Twitter is simply too powerful for the government to leave it entirely in private hands. Supervising, editing, and to some extent running social media companies has become part of the federal government’s purview, whether it openly admits it or not. When you have the White House openly calling out specific people for supposedly spreading lies and requesting bans, it’s very difficult to believe there’s a hard and fast line between public entities and private corporations anymore.

At the same time, though Twitter is unfathomably powerful tool for marketing, activism, and even defense, it faces real financial challenges. In February, Twitter disappointed on analyst expectations for revenue. To get around this, Twitter is projecting a huge increase in users – but one questions whether such a scheme is feasible. After all, it no longer can say it allows all non-violent, First Amendment protected speech on its platform.

Now that Twitter has admitted that part of its responsibility is to moderate content, it is trapped in a never ending balancing act. If it loosens its speech policies, it will infuriate users who don’t want to see tweets that they think are hateful, misleading, or both. Companies also don’t want to advertise on a toxic platform. However, if Twitter strengthens its conduct guidelines to make the platform more respectable, it risks losing users.

Many conservatives claim Twitter is biased against them, especially in its choices of which stories to promote or accounts to ban. While there have been several attempts (including by former president Donald Trump) to create a competing social media platform, none have emerged as a real competitor. That said, every user who walks away is a dagger to the heart of Twitter’s expansionist strategy.

There are also serious questions about how many accounts on Twitter are real people. In 2020, during the runup to the election, National Public Radio (the closest thing we have to “official” media) promoted a story claiming that nearly half the Twitter accounts demanding America be freed from lockdowns were bots.

Enter Elon Musk. In just a few days on the platform, he raised fundamental questions about the future of Twitter. He mused about whether Twitter is the de-facto public square, implying that First Amendment protections for free speech should apply. In a poll he posted, more than 70% of the more than 2 million voters said Twitter doesn’t hold to the principle that “free speech is essential to a functioning democracy.” He broached the idea that Twitter Blue subscribers should automatically get verified accounts – accounts that are currently dependent on a user’s behavior both on and off the platform. “Is Twitter dying?” he asked on April 9 – the last day he tweeted (as of this writing on the morning of April 12). His last tweet was simply that “truth is the first casualty.”

How should investors respond? When it comes to culture, politics, and marketing, Twitter is too big to fail. It is simply indispensable to the powerful. The network effect ensures that competitors to Twitter will likely remain marginalized. They may turn a profit or serve important functions, but they won’t drive public discussion the same way Twitter does. Elon Musk knows this. He may be reckless, careless, irresponsible and given to overstatement, but no one thinks that he’s stupid. He thinks like an engineer, not like a marketer, and I believe there is method to his madness.

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His stepping back from Twitter’s board opens the possibility for a hostile takeover. It also increases the perceived value of Twitter’s stock as people speculate about whether Musk will storm the gates. Twitter’s ability to resist is questionable – heck, founder Jack Dorsey practically apologized for setting it up to begin with, partially blaming himself for creating a “centralized” Internet. The media opposition to any move by Elon Musk will be ferocious… but that could simply drive more interest in the stock. It will be like the relationship CNN had to Donald Trump. CNN clearly hates the former president… but without him, their ratings are dropping. Conflict draws eyeballs and eyeballs are what Twitter needs.

Twitter (TWTR) is up more than 42% over the last month, but still looks extremely cheap compared to where it was just over a year ago. The complication is that we may be in the beginning of a recession and advertising revenue is likely to dry up. A move into TWTR really can be justified only in two ways. First, as an extreme long term play rooted in the belief that the social network will be able to outlast the supply chain disruptions and inflation heading our way and continue to attract new users. Second, as an extreme short-term move on the assumption that Musk is serious about his intentions to reform Twitter.

Why I’m inclined to explore this move is that these aren’t mutually exclusive rationales. Twitter is going to face serious problems in the coming months. Yet the stock is benefitting from Musk’s disruptive activities now. Given Twitter’s social, political, and economic importance, it’s also not going anywhere. Even if Elon Musk wanted to deliberately destroy Twitter, it’s doubtful he could.

As always, investors should be cautious. Elon Musk has, intentionally or not, burned people before. People who were holding the Dogecoin currency, essentially a meme, thought the pseudo-currency would skyrocket before Elon Musk appeared on Saturday Night Live. Instead, his appearance coincided with a massive decline in value. It was a classic case of “buy the rumor, sell the news.” One could argue that Twitter’s situation now is the same thing.

I don’t think so. Elon Musk remains the largest single shareholder at the company. He has massive skin in the game. He’s flirting with influencers from the populist right, which may pay off if the GOP takes back the House in the fall, as seems likely. Musk also stands to benefit as Western governments try to wrench themselves away from dependence on Russian oil and natural gas. He has motive, opportunity, and the means to make an earth-shattering play.

TWTR was declining slightly in after-hours trading Monday night. At this valuation, it is a riskier play than I usually entertain when it comes to the RID Model Portfolio. However, I was long on Twitter all the way back in January 2020 and nothing has fundamentally changed in my worldview. That said, a tech selloff looks likely on Tuesday as we brace for more bad news about inflation. It’s going to challenge any company whose solution to current problems is “more growth.”

Yet if there’s even a modest dip, TWTR looks attractive. For the powerful, Twitter is a prize that must be fought over and controlled. It can swing media coverage like no other social media platform. Today, media power translates to economic, cultural, and ultimately military power. What we call “soft power” is really just media power. Twitter is probably the most significant single media platform to control today. It’s a risk, but if you’re feeling daring, TWTR is a risk worth exploring. When it comes to Twitter and Elon Musk, I think both are too big to fail.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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