Earlier this week, the Twitter (NYSE: TWTR) share price exploded on news that Tesla CEO Elon Musk has bought a huge number of shares in the social media company. As a result, Musk is now the largest shareholder, with a 9.2% stake in the company, and he’s been handed a seat on the board.
In the past, backing Musk has been a very profitable strategy. Just look at the returns Tesla shares have made for investors over the last decade. Should I follow him into Twitter then? Let’s take a look.
Twitter stock: a big underperformer
As a long-term investment, Twitter has not been the best performer to date. Indeed, since early 2014, its share price has actually gone backwards (while the Nasdaq Composite index has climbed around 250%).
As for why the stock has underperformed, I put it down to the fact that the company has struggled to monetise its user base. Advertiser interest in the platform has dwindled and, as a result, Twitter has not generated consistent profits. In 2020, for example, it posted a net loss of $1.1bn.
Meanwhile, return on capital employed (ROCE) – a key measure of profitability – has remained very low. Over the last five years, for example, ROCE has averaged about 1%.
Given its lack of profitability, Twitter hasn’t institutional interest in the same way that other tech stocks such as Meta Platforms (five-year average ROCE of about 26%) have.
Can Musk turn Twitter around?
Could things change now that Musk is on the board? Possibly. He is a smart guy who has been described as a “passionate believer and intense critic” of Twitter’s services. He also has around 80m followers on the platform.
So he may have some ideas on how to shake things up and monetise the huge user base (around 200m users). He may also have some ideas on how to boost user growth, which has stalled recently.
On the other hand, he may not be too concerned about profitability (Tesla has never made big profits). Instead, he may just be looking to make changes to the platform. Recently, he Tweeted: “Looking forward to making significant improvements to Twitter in coming months.”
It’s worth noting here that some people believe he may have plans to make the platform more ‘freedom of speech’ oriented.
“We believe one of Musk’s main motives could be to influence moderation policies, which he has often criticised as being too restrictive,” wrote analysts at Jefferies, earlier this week. This could potentially backfire, as any changes to the company’s regulations could deter businesses from advertising on the platform.
Or he could be looking to take it private. He wouldn’t be able to do this in the near term due to the fact that his board agreement states that while he’s a board member, he can’t own more than 14.9% of the company. The fact that Musk has taken such a large stake could potentially flush out other potential bidders though.
Should I follow Musk into Twitter?
Ultimately, it’s too early to know what impact Musk will have on Twitter. Right now, it’s hard to know if his presence will have a long-term impact on the share price.
For now, I’m going to leave the stock on my watchlist. I think there are better growth stocks to buy today.
