Should I follow Elon Musk and buy Twitter shares?

Tesla founder and CEO Elon Musk just spent a whopping $2.9bn on Twitter stock. Is that a signal to buy the shares? Edward Sheldon takes a look.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla and Twitter. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »