Elon Musk's Twitter fans find value analysts don’t see

Elon Musk and an army of individual investors are now going head-to-head with Wall Street analysts in a contest over Twitter Inc.

Retail investors helped fuel record trading volume Monday for Twitter, with more than 260 million shares changing hands, after Musk disclosed a 9.2% stake in the social-media company (Mike Blake/REUTERS)

Elon Musk and an army of individual investors are now going head-to-head with Wall Street analysts in a contest over Twitter Inc. Retail investors helped fuel record trading volume Monday for Twitter, with more than 260 million shares changing hands, after Musk disclosed a 9.2% stake in the social-media company. Twitter ranked as the most purchased stock by Fidelity Investments customers as the stock had its biggest rally since the day the company went public in 2013.

Analysts have been skeptical: They've slashed their aggregate price target by more than a third since October and just 10 of the 42 brokerages tracked by Bloomberg that cover the stock recommend buying it. The shares have tumbled from their 2021 record as investors balked at a combination of a high valuation and potentially disappointing user growth. 

Buyers are betting the Tesla Inc. CEO can jumpstart Twitter by virtue of his clout as the biggest shareholder and as an influential user on the company's platform, where he has 80.4 million followers. For now, though, they're buying on faith.

“We need to know how active he's going to be,” Alec Young, macro investment strategist at quantitative-research firm Mapsignals, said by phone. “Does he have a vision for the company? We're not aware of that right now, and how active he is will make a huge difference for the stock. The stock has been sort of left for dead and analysts are lukewarm on it.”

Before Musk's ownership disclosure on Monday, Twitter had tumbled over the past year as Covid-19 lockdowns eased and investors prepared for the end of easy-money policies from the Federal Reserve.

Monday's 27% surge is “a potential over-reaction” given that it's not clear why Musk made his investment, the stock is expensive and investors have yet to see substantial progress toward Twitter's revenue and user targets, Brent Thill, an analyst at Jefferies, wrote in a note. Twitter rose 1.7% to $50.84 in premarket trading Tuesday.

Before Monday, Twitter shares sat at 50 times profit projected over the next 12 months, more expensive than about 97% of the S&P 500 Index including Amazon.com Inc. and Nvidia Corp., according to data compiled by Bloomberg. 

Activist investors usually step in when they see a company as undervalued and seek changes that will boost the share price, brandishing the ultimate threat of a proxy fight for control of the board. Musk disclosed his stake using a form for investors who don't plan to seek a change of control, and in any case the stock isn't cheap, so he doesn't seem to be following the standard activist playbook. 

But nothing stops him from sharing his opinions about how Twitter can be improved, and he's already doing that. He's polled users on whether they want a button that would allow editing of tweets, and Twitter Chief Executive Officer Parag Agrawal responded by calling it important and urging users to “vote carefully.”

Responding to a user's post, Musk also said that crypto spam bots are the “single most annoying problem” on Twitter. 

“Musk is certainly putting a lot of focus on the stock and getting people talking, and right now people are excited,” said Jon Maier, chief investment officer at Global X, which sponsors the Global X Social Media ETF.  

Twitter stock has been a long-term underperformer, returning 8.1% a year since its initial public offering versus 20% for Facebook owner Meta Platforms Inc. For Wedbush Securities analyst Daniel Ives, it's only a matter of time before Musk starts agitating for changes.

“Musk isn't going to just take a 9% passive stake and go home,” he said. “Investors are looking at this as a first step in what could be a new strategic story for Twitter.”