After months of speculation, Tesla, Inc. (TSLA) CEO Elon Musk has backed out of the $44 billion deal to buy Twitter, Inc. (TWTR). Musk had promised to buy TWTR for $54.20 per share.
Musk had been threatening to pull out of the deal lately as the social media giant failed to disclose the number of spam accounts on its platform.
In the letter disclosed in an SEC filing, Skadden Arps attorney Mike Ringler said, “Twitter has not complied with its contractual obligations. Twitter has failed or refused to provide this information. Sometimes Twitter has ignored Mr. Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr. Musk incomplete or unusable information.”
On July 12, 2022, TWTR filed a lawsuit against Musk, as his decision to back out of the deal has led to its stock price and investor sentiment tumbling. In its lawsuit, TWTR argued that having signed a binding agreement, he could not abandon it.
In the lawsuit, TWTR argues that “Musk refuses to honor his obligations to Twitter and its stockholders because the deal he signed no longer serves his personal interests. Musk apparently believes that he – unlike every other party subject to Delaware contract law – is free to change his mind, trash the company, disrupt its operations, destroy stockholder value, and walk away.”
Months of speculation have affected TWTR’s share price. The stock has declined 16% in price year-to-date and 48.3% over the past year to close the last trading session at $36.29. It is currently trading 50.5% below its 52-week high of $73.34, which it hit on July 23, 2021.
Here’s what could influence TWTR’s performance in the upcoming months:
Robust Financials
TWTR’s revenue increased 15.9% year-over-year to $1.20 billion for the first quarter ended March 31, 2022. The company’s non-GAAP net income increased 435% year-over-year to $755.57 million. Also, its non-GAAP EPS came in at $0.90, representing an increase of 462.5% year-over-year. In addition, its adjusted EBITDA increased 301.2% year-over-year to $1.18 billion.
Mixed Analyst Estimates
Analysts expect TWTR’s EPS for fiscal 2023 to decline 28.4% year-over-year to $1.18. Its revenues for fiscal 2022 and 2023 are expected to increase 15.3% and 21.3% year-over-year to $5.85 billion and $7.10 billion, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, TWTR’s 21.94x is 36.1% higher than the 16.12x industry average. Likewise, its 4.79x forward EV/S is 154.2% higher than the 1.88x industry average. And the stock’s 5.52x forward P/B is 201.8% higher than the 1.83x industry average.
Lower-than-industry Profitability
TWTR’s 4.27% trailing-12-month net income margin is 10.7% lower than the 4.78% industry average. Likewise, its 1.77% trailing-12-month EBIT margin is 81.1% lower than the 9.39% industry average. Furthermore, the stock’s 0.37% trailing-12-month asset turnover ratio is 22.2% lower than the industry average of 0.47%.
POWR Ratings Reflect Uncertainty
TWTR has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. TWTR has a C grade for Sentiment, consistent with mixed analyst estimates.
The stock is currently trading below its 50-day and 200-day moving averages of $39.67 and $43.79, in sync with its D grade for Momentum.
TWTR is ranked #27 out of 66 stocks in the F-rated Internet industry. Click here to access TWTR’s ratings for Growth, Value, Stability, and Quality.
Bottom Line
All the speculation about Elon Musk buying TWTR has affected its stock price. The stock is currently trading below its 50-day and 200-day moving averages, indicating a downtrend.
With the billionaire walking out of the deal due to TWTR’s failure to disclose the number of bots and spam accounts on its platform, its stock is expected to remain under pressure. So, it could be wise to wait for a better entry point in the stock.
How Does Twitter, Inc. (TWTR) Stack Up Against its Peers?
While TWTR has an overall POWR Rating of C, you might want to consider investing in the following Internet stocks with a B (Buy) rating: Yelp Inc. (YELP), trivago N.V. (TRVG), and Travelzoo (TZOO).
TWTR shares fell $0.14 (-0.37%) in after-hours trading Friday. Year-to-date, TWTR has declined -12.68%, versus a -18.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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