Twitter’s Shot at Becoming a Meme Stock

This email is a monument to the chaos that can be caused by the temper tantrums of a man worth ~$265B. And really, it is with a large amount of pity that I write this missive. Pity for the poor Twitter employees who just want one day where they aren’t the center of the world’s drama. Pity for the stock-picking saps who argue that “value” or “cash flow” or “having a functioning product” matters for a company’s valuation. Pity for the poor tech writers who have to completely pivot their publishing schedule to write about Walmart Brand Tony Stark’s trading habits. 

In case you missed it, Elon Musk purchased roughly 9.2% of Twitter stock for ~$3B. He was appointed to the board this morning.

This is hilarious for a variety of reasons. First, this decision was likely catalyzed via a Twitter poll in which he asked his audience whether they thought the Blue Bird platform was doing a good job with free speech. Second, despite very public instances of criticizing the company, Musk indicated through the form he used that he intended to be a “passive” investor. How someone is a passive investor while simultaneously shouting to their 80M followers that he hates the choices of management is a question for the beleaguered lawyers of the SEC. Regardless, that he managed to simultaneously flip a middle finger to the American government and to his favorite tech platform all in one afternoon is both comical and exhausting. 

The third hilarity, and the one most important for this publication, is that he immediately made a massive amount of money on the trade. Upon news breaking that Musk had taken this position, the stock shot up ~25% netting him a cool ~$700M or so within 72 hours of buying the stock. Again, this price increase occurred because a man who has no board seats, no input, and no direct power over the company, got annoyed and bought some stock. This is dumb! But this is the financial markets in 2022. 

Once he got on the board and actually had power, the rational mind might expect the stock price to explode. Instead, it only went up 8%. ¯\_(ツ)_/¯

Just last Thursday, I published a 3,200 word analysis with the totally not clickbaity title of “Twitter’s Probably Screwed.” In it, I argue that because of recent ad market changes, Twitter would never build a performance marketing product that could compete with its peers. I finished the piece by writing “Ultimately, Twitter only has one choice to become a superlative business: to find new, non-advertising revenue streams around SaaS and the creator economy. Of those prospects…I also have serious doubts.” 

The plan was to give you and me a few weeks off from Twitter. I have some scorchers ready about online sports gambling, racism in tech, and a bunch of fun stuff. However, with the Musk news, I had no choice but to bring this piece out now. Beyond the blase business strategies of SaaS or creator economy or crypto or whatever, Twitter’s new largest stakeholder offers fresh options for how Twitter can turn the ship around. I still plan to get to the creator economy/SaaS soon, but this post is a more immediate reaction to the Elon news. 

To the Moon

The traditional manner for a business to grow is dull. It's a long-ass experiment where you acquire materials, build stuff, and then sell it for more money than it cost you. If it works, then you just have to keep doing it over and over again, until one day a nice man in a Patagonia vest comes along and tells you that your company is worth a lot of money. This is an awful lot of hard work and seems tedious. 

The new (more fun) way is to simply say that your company “empowers the people” and a bunch of weirdos on the internet will buy the stock—thus making the company worth one gajillion dollars more. AMC did it! Gamestop did it! This strategy legitimately works. And to be fair, those businesses have been complete dog water after the price runup, but hey, at least their valuations are fat and juicy. Investors have had to settle more for moral returns rather than fiscal ones. 

Really, the key to being a great business in 2022 is to skip the whole profits and product thing. It is instead preferable to find a management team that specializes in grabbing retail investors by the balls and making them cough up cash. You can then use your newly inflated stock price to purchase productive assets. Skip the whole hard work thing and just use free money to buy companies that actually produce profits.

If this strategy is legitimate, then Twitter has had an incredible stroke of luck with its newest board member. The most-skilled CEO on the planet for this task is Elon Musk. He is the king of nut-grabbing. All of his companies’ valuations push the limits of reason (in particular Tesla), but retail investors just. keep. buying. If your goal is to massively increase your stock price while simultaneously not changing a single thing about the business, there is only one person I would call. 

Note: When I said that I was going to be spicier now that I was an independent writer I wasn’t kidding. 

I know that I come off as dismissive of this ploy, but I think there is real merit to this argument. At the highest level of abstraction, companies compete on getting the highest return for every dollar that they invest. There are two ways to do so: first, you could try to make lots of money or second, you could make sure that the dollar you are investing costs you nothing. By decreasing your weighted average cost of capital to basically 0, you can juice your returns. 

Twitter appears to be kinda, sorta trying to walk the same path as Gamestop. Their plan? Ask Elon to join the board, change absolutely nothing about the business, watch their stock price soar, and then use that stock to do something.

The company is currently sitting at a ~$40B valuation. This was after a ~25% increase in price with the news of the Elon stuff. During the Gamestop debacle, the Gamestop stock peaked at a 4700%+ price increase. Let’s say Elon can muster similar levels of religious fervor—Twitter would then sit at a measly $1.89T valuation.  If I were them, I would then go on the most unholy shopping spree you’ve ever seen. They could become a content player and buy Netflix, Disney, and Crunchyroll. Maybe they roll up all the social media companies and amalgamate TikTok, Snapchat, and Pinterest. Shoot, maybe they become a software provider and buy Shopify and Salesforce. If Elon is feeling particularly spiteful, he could attempt a takeover of Facebook for $600B or so.

This whole strategy is a smidge unbelievable. The likelihood of success is small. However, if Twitter were to really become a meme stock and hit a $200B valuation (a mere 400% increase or a tenth of what Gamestop did) they could deploy the strategy above and approach Snap/Pinterest about creating a more robust user/ad network. A merger of equals would allow them to get a jumpstart on user growth. Additionally, it could fix their problems around building a performance marketing business by increasing the amount of attributed user data. 

Personally, I would feel very sad if this whole strategy ends up working. I’ve spent most of my professional life grinding, pouring all of my intellectual energy into trying to build a startup worth a billion dollars. All of those efforts failed (so far!) but I am grateful for those hard-won lessons. If Twitter becomes a superlative business merely by having someone famous on its board, I will weep for capitalism. It is a legitimate strategy that appears to have early indicators for success! But it just sucks.

I recognize that paragraph was crusty and curmudgeonly and bequeathed with get-off-my-lawn energy, but I am personally tired of seeing businesses build hype before they build value. I want nothing more than for Twitter to succeed. But I want it to happen in the right way. I want genuine product innovation, a restructured GTM motion, or something even wackier. If Twitter wins simply because they have the world’s loudest man shouting about the stock it’ll feel like those who are trying to build real businesses, the right way, have lost.

My prediction is that Elon will likely end up being more of a hindrance than a help as Twitter tries to hit its $7.5B in revenue and 315M monetizable daily active users. His concerns so far seemed to be around free speech and having an edit button—not growing incredibly quickly or improving ad performance. ARPU and growth should be the clarion calls, not Elon Musk’s pet peeves.

If they choose to not lean into the memehood, Twitter will have to go with the original choices I suggested last week—building subscription products. But that is a post for another day :)

Note: I'm going to experiment with more rapid-fire, shorter takes for paid subscribers about breaking news. What do you think? Good idea? Terrible? Would really love your feedback on this as a potential product extension for Napkin Math. Let me know!

-e