Elon Musk is doing what Elon Musk does best, attracting attention.
Indeed, the man that has helped promote Tesla (TSLA) to become perhaps the most famous cult stock ever from his perch as CEO has taken up a new target. This time, he is setting sights on the platform he most frequently uses to discuss Tesla (for better or worse): Twitter (TWTR) .
In a bold move, the Tesla front man took on a whopping Musk 73,486,938 shares of the social media giant per a recent 13G filing, amounting to just over 9% of the company's outstanding shares. The major investment makes the brash CEO the firm's largest shareholder.
Appropriate for the SpaceX founder, TWTR shares have rocketed higher since the disclosure. Since Friday's close, the stock has shot up about 30%.
The question that remains for shareholders in shock at the sudden rally is simple. Is Elon Musk's investment and involvement worth such a premium?
Big Changes From the Boardroom?
Of course, the main rationale for the immediate jump in the stock is the expectation that Musk, who has often agitated for free speech protections on the platform, is going to force changes. Judging by his activity on the very site in question, this may well be coming soon.
Do you want an edit button?
— Elon Musk (@elonmusk) April 5, 2022
The idea is that some key changes, both in terms of simple functions like an edit button and firmer protections for user expression, will encourage stronger user growth and retention. Certainly some analysts see this narrative as reasonable.
"We believe Musk joining Twitter will lead to a host of strategic initiatives which could include a range of near-term and long-term possibilities out of the gates for the company still struggling in a social media arms race," Wedbush analyst Dan Ives said in a note shortly after the announcement. "It's time to get out the popcorn and watch the developments over the coming months with Musk on the Board."
However, this optimism is not unanimous.
In fact, many Wall Street experts have endorsed a neutral stance on Twitter stock as its recent surge balances the opportunity ahead.
"While we are excited and intrigued at the prospect of Elon Musk taking a potentially active role at growing Twitter, we believe the near-term risk/reward is fairly balanced at current levels," MKM Partners analyst Rohit Kulkarni wrote in a note on the major development.
As a result he downgraded the stock to "Neutral" from "Buy."
"Any softness in brand advertisers' spend in Europe might weigh on Twitter's second quarter outlook," Kulkarni added.
Writing this from the heart of Europe, I can personally attest to conversations with companies tightening their belts. This often trickles through to advertising budgets first. As Meta Platforms (FB) and Alphabet/Google (GOOGL) will be the first stops, this stands to impact Twitter most pointedly.
The situation in the U.S. should not be markedly dissimilar and Twitter's shutdown in Russia is not helpful either. Even aside from these headwinds, there is a question of whether changes to Twitter are most applauded among potential new users, or simply an existing Musk fan base already fervently active on the platform.
Filing Folly?
Musk could also have issues with his long-standing rival in the SEC, which stands for the Securities and Exchange Commission despite Elon's allusions to an alternative acronym.
Do you want an edit button?
— Elon Musk (@elonmusk) April 5, 2022
Per the Commission's rules, a Schedule 13G filing denotes a passive stake. This means that an investor filing this form does not plan to exert influence over a company. Clearly, Musk was not adhering to these standards in immediately acceding to the board and calling for changes.
Further, there were problems with Musk's timing.
Rules state the form must be filed within 10 days of the event. Musk's filing gives the date of the event as March 14, which means his early April disclosure came in quite tardy. Since Musk has done little to ingratiate himself to the SEC, it would be surprising to see no action taken by the regulator.
To be sure, Musk did amend his filing in an attempt to avert a major issue. Nonetheless, the initial error will definitely attract attention.
At the very least, it should put the brakes on the potential takeover bid that some bullish analysts are expecting.
Not Much Room to Run
In the end, the problem with Twitter is in the fundamental risk and reward dynamics after such a stunning surge skyward.
As Real Money's own Sarge Guilfoyle noted earlier this week, the company was already expensive prior to the most recent move. Further, there are issues in the underlying company dynamics that make justifying any purchase difficult from a fundamentals standpoint.
Yet, arguably more pressingly considering the momentum focus of the sustained boost in share price, are the chart dynamics.
"I would not recommend purchase of the shares at this point in time," Real Money chart guru Bruce Kamich recommended in his assessment on Tuesday. "Let the financial journalists write stories about Musk and Twitter till their fingers get tired. Then, maybe, we will calmly take a look at the charts again."
As my fingers begin to grow weary in their own right, I am inclined to take the same tack. There are simply too many overhangs to encourage aggression at these levels.
