Investors overreacting to Elon Musk's Twitter stake, analysts say

Musk named to board after becoming platform's largest shareholder with passive 9.2% stake

Twitter shares continued to climb Tuesday after Elon Musk was appointed to the social media giant's board of directors

Ticker Security Last Change Change %
TWTR TWITTER INC. 38.38 +0.15 +0.39%

Musk was named to the board shortly after becoming the platform's largest shareholder with a passive 9.2% stake. The disclosure caused shares to surge 27% during Monday's trading session. 

ELON MUSK ADDS $1B TO FORTUNE WITH TWITTER INVESTMENT AS SHARES SOAR

Musk's stake and recent criticism over Twitter's approach to free speech have led to speculation on Wall Street over what he's planning for the future of the company, including the possibility of an all-out buyout.

Bernstein analysts Mark Shmulik and Toni Sacconaghi Jr. believe Musk's interest is "mainly personal" and nothing more than a "potential distraction."

"We view the interest as a potential distraction for Musk and TSLA shareholders, given that Musk is arguably already overcommitted, and his fervor for the topic of censorship/free speech is high," Shmulik and Sacconaghi wrote in a note to clients on Tuesday. "The magnitude of the pre-market stock move speaks volumes of an investor base eager for any positive jolt, as the stock was previously around IPO levels. Some investors are certainly hoping for a sale, but we believe the stock move is likely an overreaction for this broadly speculative possibility."

Elon Musk

Elon Musk, Tesla CEO, stands in the foundry of the Tesla Gigafactory during a press event. (Patrick Pleul/picture alliance via Getty Images / Getty Images)

They argue that the investor buzz around Twitter seems "a bit extreme" given that its fundamentals and challenges remain "broadly the same." Though Musk's intentions for Twitter remain unclear, the firm's analysts speculate that Musk taking the company private, inserting himself into leadership or doing nothing at all are all potential options on the table. 

Bernstein maintains a "market perform" rating on Twitter with a price target of $40 per share.

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Jeffries equity analyst Brent Thill also called Monday's gains a "potential overreaction given the unclear rationale behind Musk's ~$3.7B investment." 

He noted that a key focus for investors moving forward will be the platform's ability to reach its goals of $7.5 billion in revenue and 315 million daily monetizable daily active users by fiscal year 2023. 

"In order to reach the 315M mDAU target, TWTR will need to grow its users at a 20%+ 2YR CAGR, which is well above the 13% growth rate in FY21," he added.  "At current levels, TWTR now trades at a >100% premium to FB on an EV/EBITDA basis, which is well above the 2YR average of 86%. In the near-term, we expect the stock to remain range bound until investors gain greater comfort around new management's ability to execute against the company's long-term targets."

Ticker Security Last Change Change %
GOOGL ALPHABET INC. 2,265.26 +90.51 +4.16%
FB n.a. n.a. n.a. n.a.
SNAP SNAP INC. 14.38 +1.21 +9.19%

He recommends holding Twitter and buying competitors Alphabet, Facebook and Snap Inc.

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On Tuesday morning, Musk tweeted that he looks forward to working with Twitter CEO Parag Agrawal and the company's board to make "significant improvements" to the platform in the coming months.

In addition to Musk, Twitter's largest shareholders include the Vanguard Group, Morgan Stanley, BlackRock, State Street, Aristotle Capital Management, FMR, Twitter co-founder and former CEO Jack Dorsey, ARK Investment Management and ClearBridge.