Should you follow Elon Musk into Twitter?

Twitter (NYSE: TWTR) certainly punches above its weight in the world of social media. The platform only has 217m daily active users compared to Facebook’s (NASDAQ: FB) 2bn-plus, but Twitter’s users move markets, create news stories and drive political decisions.

It has also become a platform for figures like Elon Musk and Donald Trump to reach their supporters around the world (although Trump was banned at the beginning of 2021). And Musk has now decided to take his love of the platform further by acquiring a 9.2% stake in the social media company.

It seems the billionaire bought the majority of this $2.9bn stake in early March when shares in the social media company were trading in the low $30s. After his position was announced, the stock jumped to more than $50.

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The billionaire has acquired a major position in one of his favourite toys

Musk is one of the platform’s most prolific users with more than 80m followers. He’s also used Twitter to reach out and appeal to his band of loyal followers around the world.

Last year he famously asked if he should sell 10% of his stock in his electric car firm Tesla (NASDAQ:TSLA). Twitter users said 'yes' and Musk sold around $5bn (£3.7bn) of his stake, although he still owns 17% of the company (worth around $200bn at today’s price).

The billionaire’s antics have produced a huge amount of publicity for Twitter, and for a company that thrives off attention and advertising, that is no bad thing.

Advertising made up 89% of Twitter’s revenues in the fourth quarter, so this is where the real money comes from. The enterprise also sells data subscriptions to companies and developers, an important and growing revenue stream.

Advertising includes Promoted Ads and Follower Ads, which can cost anywhere from $0.50-$4 for every time a user clicks on the ad or follows the advertiser’s account. Around 85% of the advertisers on the platform are large companies like Disney (NYSE: DIS), but 15% are small and medium-sized businesses.

Over the past two years, the group has really stepped up its growth ambitions, laying out an ambitious target to generate revenues of $7.5bn in 2023, more than double the $3.5bn reported for 2019. And there is certainly plenty of room for the company to expand. The global advertising market (excluding China) was worth around $500bn in 2021.

Twitter continues to seek out new ways to monetise its content

To hit its growth targets, the platform will need more users. Having high-profile accounts on the platform like Musk is helping the group reach a larger audience. The pandemic has also helped as users have come to rely on Twitter for breaking news and health updates over the past two years.

Tweeters (or to give them their full name, Average Monetizable Daily Active Users) grew 13% last year as a result of “product improvements, as well as global conversation around current events.” The company’s new CEO, Parag Agrawal, who took the helm in November 2021, thinks the social network can reach 315m daily users by the end of 2023.

What does Musk want with the business?

Musk’s stake in the company has certainly generated a lot of buzz, and Twitter’s decision to appoint the billionaire to its board of directors is a notable development. Still, it is unclear if his presence will translate into a longer term benefit for the company.

It could be the case that the billionaire is trying to change the company from within. He has been campaigning for Twitter users to have the ability to edit tweets and he has also criticised the platform for its free speech policies.

But even if he is able to drive through changes, it is difficult to say if they will have a noticeable impact on user growth and revenue generation. As social media users tend to be quite resistant to change, any new features Musk drives through might cause a backlash. Past changes to Twitter’s layout have caused uproar.

After the events of the past week, Twitter shares are trading on a forward price-to-earnings (p/e) ratio of 44. That seems expensive even for the high-flying US tech sector. Facebook sits on a forward p/e of 16 while Snap (LSE: SNAP) and Pinterest (LSE: PINS) are trading on multiples of 38 and 19.4 respectively. Twitter’s growth potential explains some of this premium, but not all of it. And this growth is only projected, not guaranteed.

Musk’s decision to make himself one of Twitter’s largest investors has certainly generated a lot of chatter on and off Twitter, but if the company cannot meet its ambitious growth targets, he might regret his decision.