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What should investors make of Musk's Twitter stake?

Sandy Ward  |  05 Apr 2022Text size  Decrease  Increase  |  
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Twitter (TWTR) shares rocketed higher Monday on news Tesla founder and chief executive Elon Musk took a stake in the social media platform, making him the company’s largest outside shareholder.

Twitter rose 30% to $51 per share from $39.31, representing the biggest intraday move since the company went public in 2013. The stock has been trending higher since Musk bought his stake on March 14 for an estimated $2.4 billion.

Twitter stock performance

At current levels, the stock remains below the $58 fair value estimate Morningstar senior Equity analyst Ali Mogharabi assigns to the stock. However, at $51 per share a of midday Monday, the stock is in what Morningstar considers "fairly valued" territory. At this price level Twitter would be a three-star stock.

Musk’s 9.2% stake, disclosed in a regulatory filing with the U.S. Securities and Exchange Commission, is considered passive. While Musk’s intentions are unclear, Mogharabi sees his stake as impacting Twitter’s long-term strategy.

“Musk could seek to influence the openness of the platform and how it controls content or push to invest in the subscription model more aggressively as it has with Twitter Blue,” Mogharabi says.

Twitter valuations

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Musk’s Twitter stake comes as the outspoken billionaire continues to battle the Securities and Exchange Commission in connection with a 2018 consent decree that calls for Tesla lawyers to approve tweets and other statements that could be material to the electric vehicle maker.

Musk came under scrutiny for comments posted on Twitter about Tesla that were considered to be material. With 80.2 million Twitter followers, Musk argues that the consent decree is limiting his free speech. He’s been equally critical of Twitter’s adherence to principles of free speech, and has threatened to start his own social network.

His stake dwarfs that of founder and former chief executive Jack Dorsey who owns 2.25%. Vanguard Group has a 8.39% stake, and Morgan Stanley Investment Management, at 8%, are the next biggest holders after Musk. Unlike other major media companies, Twitter has no controlling shareholder, giving rise to takeover speculation.

Dorsey resigned as chief executive in November 2021, nearly two years after activist investor Elliott Management began agitating for his ouster. Prior to Dorsey’s departure, Twitter agreed to give Elliott a board seat. The company also accepted a $1 billion investment from Silver Lake Partners, whose co-chief executive and managing partner, Egon Durban, also joined the company’s board. Durban advised Musk when he explored the idea of taking Tesla private. It was Musk’s Aug. 7, 2018 tweet that he was considering taking Tesla private at $420 a share, and had funding secured, that got him into hot water with the SEC.

Sandy Ward is a markets columnist for Morningstar.com

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