Stock of the week - Twitter (14.07.2022)

A company that has been on the lips of the entire investment world over the past week is Twitter (TWTR.US). On Friday, financial markets were abuzz with the news that Elon Musk had officially backed out of the purchase deal, and this version is the current one. Whether he has finally abandoned the purchase of the platform or whether it is simply a play to lower the transaction price we will probably find out in some time, but right now it is worth shedding some light on the said transaction.

Q1 2022 results

On April 28 before the session, Twitter released its financial results for Q1 2022. The popular platform generated revenues of $1.2 billion versus $1.04 billion in Q1 2021. (15% y/y) against a market consensus of $1.23 billion. Net income was $513.3 million vs. $68 million in Q1 2021. (655%). EPS was $0.61 vs. $0.08 in the same period of 2021. An important figure from Twitter's perspective is the monetizable daily active users of the portal (mDAU), which amounted to 229 million, up 16% y/y. This was slightly higher than the consensus set at 226.9 million. The company did not present any earnings forecasts for future periods - at that point the market was almost certain that Elon Musk would buy Twitter then delist it.

How a "sure deal" was canceled

In mid-April, Elon Musk made an offer to buy back all Twitter shares at $54.20 apiece. As a result, the deal amounted to $44 billion. Twitter's board of directors originally perceived the move as a hostile takeover attempt, but an agreement was reached and a final deal was reached with the board on April 25 to buy Twitter. Musk saw huge potential in the social media platform, which can be unlocked if spam bots can be defeated. The Tesla chief expected evidence that Twitter bots account for less than 5% of all accounts. According to him, the higher number of "fake" accounts significantly reduces the company's profitability, which consequently reduces its value. Last Friday, Tesla's chief executive informed the world that he was pulling out of the Twitter acquisition deal, citing as a reason a failure to meet contractual obligations, according to which the company failed to provide the required information on the number of inauthentic accounts and spam. 

Purchase under duress?

Twitter's management has not left this news unheeded. Bret Taylor, Twitter's CEO, issued an announcement according to which the company he runs intends to take legal action against Musk in order to force him to fulfill the terms of the deal and acquire Twitter. Both parties to the would-be deal have agreed to pay up to $1 billion under certain circumstances. 

Time will tell whether the above battle will end in a takeover at the agreed price of $54.20, a lower price, or one of the most media disappointments in history. 

A technical look

Twitter shares, after recent declines due to Musk's withdrawal from the company's takeover deal, are storming the level set by the strong consolidation zone defined by the channel between $36.70 and $38.50. Potential increases may not be supported by a head and shoulders formation with a peak at the level set by the price equal to Musk's offer of $54.20 per share. A potential risk factor could be a change in Elon Musk's decision in the context of the deal, which could favor a short-term price hike. 

Twitter (TWTR.US) stock price chart, D1 interval. 

Source: xStation 5