Twitter Equity Worth $20 Billion? Guess Again

Elon Musk recently told employees Twitter equity is now worth $20 billion, far less than he paid. Good luck with even that. I estimate EV at little more than $13 billion in debt. So what's he up to?

Elon Musk recently told employees Twitter is now worth $20 billion, reportedly less than half versus the $44 billion he paid for the company back in October (see my reportsElon Has "Freed" Twitter: Send The Ravens on 10/28/22 and Is Elon About To Tap Tesla For Billions in Debt To Bolster Cash—And Help Him Buy Twitter? and 10/19/22).

Details are fuzzy; like is Musk referencing Twitter’s equity or its enterprise value?

It’s a big difference. Twitter’s price tag comprised $32 billion in equity and $12.5 billion in debt. Using this measure, Musk would be confessing that equity value has fallen to $7.5 billion—down 77% since the deal closed.

Worse, I think even that equity valuation is too high. For one thing, I expect Twitter has drawn down its credit line on top of the original $12.5 billion in loans. As I warned last fall:

Twitter can’t absorb such a rapid and severe liquidity crunch. After paying off all its stockholders when Elon closed the sale, Twitter used most if not all its cash on hand—last reported at $6 billion—to retire its bonds as expected (see Elon Has "Freed" Twitter: Send The Ravens, 10/28/22). Following that, Twitter has a meager $500 million revolving credit line with a potential $1.7 billion accordion expansion to support liquidity. At the rate the company is deteriorating, it may run through that in a quarter or two.

Elon Is "Saving" Twitter To Death, 11/28/22

It appears I was correct. After the deal closed, Twitter stopped paying rent and has

been leaving vendors high and dry:

Apparently, my concerns were on point. Elon has stopped paying Twitter’s bills—a classic move he used for years at Tesla—including severance to fired employees, vendors, bills for chartered flights, and even rent at the company’s headquarters in San Francisco or any of its global offices. He dismantled office kitchens and is selling off kitchen equipment and office furniture, illegally fired janitors, and he turned conference rooms into makeshift bedrooms so workers don’t leave (which violates city building codes).

Not paying bills and flouting labor laws don’t make problems go away—it magnifies them. But, as I have warned, Twitter has few options as its liquidity runs dry.

Elon Sold More Falling Tesla Stock. Margin Calls? Twitter Failing? Bank Demands? Likely All Three on 12/18/22

This has continued through the first quarter, as Musk still refuses to let Twitter pay its bills even after slashing Twitter’s workforce from 7,500 to some 1,300, down 83%. “Elon would always say ‘Let them sue’, reported Financial Times. “It was a constant refrain,” said one former senior staffer who was let go in the latest cuts. “It’s all very short-term thinking.”

Short-term, and desperate. If so, Twitter likely has increased debt by $500 million to as much as $2 billion, and even that cash could be drained before year end.

Let’s split the difference and assume debt is up by $1 billion on top of the original $12.5 billon. If so, a $20 billion enterprise value indicates equity value dropped to just $6.5 billion, down 80%.

But wait, there’s more. We know that Twitter’s business has crashed since Musk took over (see Elon Is "Saving" Twitter To Death, 11/28/22. While Musk touts increased user count, much of that growth has come from the very negative elements who have, in addition to Musk himself, driven off advertising dollars which account for more than 90% of Twitter’s revenue.

Twitter can no longer guarantee brand safety or even basic security to advertisers or users, problems which already have triggered several government probes in the US and Europe on top of other legal jeopardy his actions have created:

The impulsive firings plus increasing failures of the remaining shell of worker staff to sustain its vulnerable infrastructure are also increasing legal risks for Twitter with safety and legal compliance, and labor law, FTC regulators, cyber security risks, and more.

Elon Is "Saving" Twitter To Death, 11/28/22

So I wasn’t surprised to learn that Twitter was losing $4 million per day just weeks after Musk took over. As I wrote in Business Insider:

I've analyzed how companies get into and then out of financial distress for more than 20 years, and I've never seen new management blow up a company as fast as Musk is destroying Twitter.

Vicki Bryan in Business Insider, Elon Musk gambled big on Twitter. Tesla is going to pay the price, 12/5/22

We can’t know for sure how bad it is now that Twitter is privately held and no longer required to file any public reports on its operations and financial condition. The Wall Street Journal reported insiders who claimed revenue and adjusted earnings fell 40% in December alone. I suspect full quarter results likely were much worse.

That would track my rough estimates for trailing 12-month revenue as of Q2 this year at $3-3.4 billion and EBITDA potentially negative by as much as $2 billion. This includes Q2 EBITDA potentially negative by as much as $80 million.

My Q2 EBITDA estimate falls short versus Musk’s recent claim that Twitter may be “cash flow break even” for the second quarter, with positive EBITDA. Though he “emphasizes the “D” is quite big and they need to focus on the “E” part.”

It’s also important to remember that Musk’s versions of EBITDA generally all fall into the aggressive and even “creative” category at all his companies over the years, as I have often noted.

In any case, achieving even nearly positive, if dubiously defined EBITDA in the most recent quarter is a far cry from generating sustainably positive operating cash flow—especially if much of that cash flow comes from not paying your bills. And this is even before Twitter tries to service now $1.5 billion in annual interest costs on its crushing debt load as variable interest rates have climbed since the deal closed.

So what does this say about Twitter’s enterprise value? Using Snapchat SNAP 0.00%↑ as a logical comp, for example, indicates enterprise value based on 4x revenue. Indeed, this is generous for Twitter since, unlike Twitter, Snapchat is publicly traded so its numbers are verifiable.

Assuming my $3-3.4 billion estimate for LTM revenue indicates Twitter’s enterprise value at just $12-13.6 billion. Uh oh. This indicates equity wiped out, as I projected, after deducting $13 billion or more in debt offset by little if any cash.

No wonder Musk failed back in December when he was trying to tap his beleaguered fellow Twitter equity holders for another $3 billion in cash via selling additional stock so he could chip away some of that debt load. He was effectively asking them to double down on zero—a zero he made out of Twitter in less than two months.

Now consider that Musk’s recent $20 billion quote was actually his value for current Twitter equity and the basis for new compensation stock grants to employees. He told employees he sees Twitter on a “clear, but difficult, path to a >$250B valuation,” meaning stock granted now would be worth 10 times more.”

Sure it is. Three months after he couldn’t even sell a $3 billion equity offering to existing shareholders, when he’s still got Twitter far in arrears on substantial operating expenses amid burgeoning legal obligations, Musk tells employees Twitter’s equity has swelled nearly 7x that amount to $20 billion.

Why? Well, for one thing, drastically overstating the value of stock he pays as stock-based compensation to the skimpy remnants of remaining Twitter employees can let him also underpay accordingly the cash they earn as the other part of their comp. Which would be totally on-brand for Musk.

Anyway, what can they do about it? “Let them sue,” as Musk says.

Stay tuned.

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