For a company that’s supposed to be bought out, Twitter (NYSE:TWTR) stock surely doesn’t trade like that’s the case.
In fact, TWTR stock is 26.5% below its deal price. Currently trading below $40, the stock is below the pre-takeover rumors that sent it bursting higher in April.
As a refresh, the company originally balked at Musk’s deal, seemingly intent on not accepting it simply because of who was making the offer. Keep in mind, Twitter tried to sell itself once before, but the bids evaporated and the company stayed independent.
The company hired Goldman Sachs to advise it on the takeover attempt by Musk. Interestingly, the firm advised Twitter not to accept the deal.
Its M&A team and equity-analyst team obviously have a wall between them. The equity team had a sell rating and $22 price target on TWTR stock. Yet, the $54.20 all-cash takeover offer from Musk apparently undervalued Twitter according to the M&A team.
After plenty of back-and-forth, Twitter agreed to a deal with Musk at $54.20 a share. Only we’re a long way from that level now.
A Closer Look at TWTR
A few weeks ago, we reported on Hindenburg Research’s short position, which has since been closed out. The thesis was that Elon Musk only faces a $1 billion breakup fee if he walks from the deal.
As for “why” he may walk, it was because shortly after the deal was announced, Twitter confirmed in an earnings report that it had misstated its users for roughly three years.
Ensuing spats — on Twitter, of course — between Musk and Twitter CEO Parag Agrawal have only added to the drama.
Hindenburg’s thesis argued that Musk may walk from the deal over the misstated user numbers and concern on how many users are actually bots.
Further, Musk has leverage. If he walks and has to eat the $1 billion breakup fee, he could always come back and make another offer knowing that TWTR stock will crater if he walks from the deal.
So will he? That has yet to be determined.
TWTR Stock Lacks Catalysts
Unfortunately for investors, TWTR stock is locked in a binary event. Either Musk doesn’t go through with the deal and the stock price falls or he does and it soars toward $54.20.
I personally don’t care for binary events. It works for some investors and some arbitrage investors can really snuff out some value.
However, these black-or-white scenarios lack the gray area that many investors perform better in. For Twitter, a lot hinges on this deal. Even though Twitter stock has fallen in recent weeks as doubts linger over the deal, it’s held up better than many social media stocks.
That said, Twitter’s business is improving. Analysts expect earnings to grow 16% this year and 21.5% in 2023. Estimates call for earnings of $1.66 per share this year too.
Therein lies the problem, though.
While that leaves shares trading at 23 times estimates, it’s considerably more expensive than Meta, which trades at roughly 16 times this year’s earnings.
It’s also more expensive than Pinterest, which has a lower valuation (20 times earnings) and better revenue growth forecasts (18.4% in 2022 and 23% in 2023). Both Pinterest and Meta have considerably better margins, as well.
Put it all together and it’s hard to make the non-acquisition, fundamental case for TWTR stock. Its short-term destiny seems to hinge completely on whether Musk will go through with the deal or not. That’s not something I’m looking for as an investor.
On the date of publication, Bret Kenwell held a long position in PINS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.