#SocialStocks: All Signs Point to Musk’s Twitter Buyout Closing on Friday

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Meta investor clamors for more change, Snap plummets after earnings and other notable stories from this week

Welcome to “#SocialStocks,” The Fly’s weekly recap of Wall Street’s reactions to social media stock news.

CLOSING TIME: 

Tesla (TSLA) CEO Elon Musk tweeted “Entering Twitter HQ – let that sink in!” along with a video of himself entering what appears to be the lobby of the company’s headquarters. Musk, who changed his Twitter (TWTR) bio to “Chief Twit,” will be in Twitter’s office this week and will address the staff on Friday, Bloomberg reported, citing a staff memo. Musk’s meetings are said to the “beginning of many,” Bloomberg’s Ed Ludlow added. Bloomberg previously reported that Musk has told bankers he expects his deal to buy the blogging service operator to close by the Friday deadline imposed by a court. Shares of Twitter are up 1% to $53.21 in afternoon trading following the latest report that Musk is visiting the company’s headquarters this week. This comes after CNBC’s David Faber tweeted: “Equity investors in Elon Musk’s take private of Twitter have received paperwork from his lawyers at Skadden Arps in order to prepare for closing the deal. It’s another sign deal is on track for Friday close.”

South Korea’s Mirae Asset Financial Group is planning to commit about $208M to help finance Musk’s buyout of Twitter, according to Reuters, citing a source familiar with the matter. This report came after Laura Cooper and Alexander Saeedy of The Wall Street Journal wrote that the banks that committed to help finance Musk’s Twiiter takeover plan to hold all $13B of debt backing the deal rather than syndicate it out. The banks, which include Morgan Stanley (MS), Bank of America (BAC) and Barclays (BCS), decided to keep the debt on their balance sheets to avoid selling it at a loss to bond and loan fund managers, sources told the Journal. Ken Griffin has committed to back Musk’s bid, Brian Chappatta of Bloomberg reported Thursday night. The amount pledged was less than $20M. The backing from Griffin has not been disclosed publicly by Musk and Twitter had described the Citadel founder as an “actual or potential” co-investor in the equity financing for the deal, noted Chappatta.

While the deal is looking more and more likely to close, there is also the possibility of outside scrutiny of the social media giant’s acquisition. The Biden administration is considering subjecting some of Musk’s ventures, including the Twitter deal and Starlink, to national security reviews, Bloomberg’s Jennifer Jacobs and Saleha Mohsin reported. According to people familiar with the matter, U.S. officials have grown “uncomfortable” since Musk’s recent threat to stop supplying the Starlink satellite service to Ukraine, what they see as his increasingly Russia-friendly stance, and his plans to buy Twitter with a group of foreign investors. The discussions are still at an early stage, the people say, adding that one possibility is through the law governing the CIFUS to review Musk’s deals and operations for national security risks.

As for Musk’s thoughts on the prospects of the Twitter deal, he provided some insight on tesla’s quarterly conference call last week. Musk said on the company’s Q3 call a week ago that he is “obviously overpaying” for Twitter, but is “excited” about the situation. “Though myself and the other investors are obviously overpaying for Twitter right now, the long-term potential for Twitter is an order of magnitude greater than its current value,” Musk said.

POST CLOSING: 

Musk is planning to cut 75% of Twitter’s workforce when he takes control of the social network, according to documents obtained by The Washington Post. According to the report, Musk would cut Twitter’s staff to just more than 2,000 people, compared with the 7,500 it currently employs.

INVESTOR UNREST: 

Altimeter Capital Chairman and CEO Brad Gerstner said in an open letter to Meta Platforms (META) and CEO Mark Zuckerberg that the company has too many employees and is moving too slowly to retain the confidence of investors. Gerstner said in the letter: “Meta needs to get its mojo back. Meta needs to re-build confidence with investors, employees and the tech community in order to attract, inspire, and retain the best people in the world. In short, Meta needs to get fit and focused. To accomplish this goal, we recommend a three step plan that will double FCF to $40B per year and focus the company’s teams and investments: Reduce headcount expense by at least 20%; Reduce annual capex by at least $5 B from $30B to $25B; and Limit investment in metaverse / Reality Labs to no more than $5B per year.” The executive added that “People are confused by what the metaverse even means. If the company were investing $1-2B per year into this project, then that confusion might not even be a problem.” Gerstner concluded by saying: “We don’t have any demands. We simply wanted to further engage and continue sharing our thoughts as an interested shareholder. We believe in this team. We know Meta has more reach, more relevance, and more incredible opportunities for growth than almost any platform on the planet. And we are confident that your long-term investments in AI and the next generation of communications will continue to drive us all forward.”

WHATSAPP WITH THAT?: 

Meta’s WhatsApp suffered an outage in several countries around the world for about two hours on Tuesday morning, The New York Times’ Jenny Gross and Adam Satariano reported. The outage started around 3 a.m. Eastern time, according to Downdetector, and users reported that services were back up after 5 a.m. The outage affected countries including Britain, India, and South Korea.

META WARNS CANADA OVER NEWS CONTENT: 

Facebook owner Meta Platforms has warned Canada it is prepared to block the sharing of Canadian news content – like it did in Australia last year – unless the Liberal government amends legislation that would compel big digital companies to compensate domestic media outlets, The Wall Street Journal’s Paul Vieira reported. The legislation is under review by a parliamentary committee, and lawmakers voted this week to stop hearing further testimony from witnesses. Facebook said it wasn’t given an opportunity to testify, so late Friday it issued a statement outlining the company’s concerns with Canada’s proposed rules – and a warning, the author notes.

NO SAN FRANCISCO: 

Snap (SNAP) has decided to close its office in San Francisco as part of its recent restructuring, which has led to at least 1,200 full-time employees being laid off and a number of projects being shut down, Insider reported, citing a person familiar with the matter.

A $10B DROP IN THE BUCKET: 

Yat Siu, the co-founder and executive chairman of blockchain game company Animoca Brands, said at TechCrunch Disrupt that Meta’s $10B investment in creating the metaverse isn’t enough, TechCrunch’s Romain Dillet reported. “They said they’re going to spend $10 billion a year to make the metaverse work,” Siu said. “Well, here’s the thing – we think $10 billion is not enough for Facebook to succeed. Billions of dollars are transacted in the open metaverse space – actually much more when you consider fungible tokens. Most of the value goes to the end user, so why would I transact on something like Meta – regardless of its visuals – when I have to give half of it to the platform? Whereas if I use Sandbox, I get 95% of it. It just doesn’t make any sense for me to do that, economically speaking. And because billions of dollars of value are already generated in an open way, why would I surrender that value? So Facebook would have to spend a lot more to incentivize people to go into its platform.”

MUSIC DEAL: 

Pinterest (PINS) blogged in part: “Pinterest announced new partnerships with Warner Music Group (WMG), Warner Chappell Music, Merlin, and BMG, to bring today’s top artists and music on the platform. Through these new deals, users will now be able to add tracks from Ed Sheeran, Silk Sonic, Anitta, and many more to their Idea Pins. This partnership expands Pinterest’s existing royalty-free music library to include licensed popular tracks powered by 7Digital, the leading B2B digital music solutions platform, which will enable the Pinterest community to access a global catalog of music. Additionally, Rumblefish is providing Pinterest with music metadata and license management services…In addition to the new catalog of music and artists, now available on iOS and Android, Pinterest also rolled out a new music user experience to make it even easier for Pinners and creators to find and add their favorite tracks to Idea Pins. This new experience will give users the ability to search for their desired track by song title, artist, or keyword.

EARNINGS RECAP/PREVIEW: 

Snap reported third quarter results last week and noted an uncertain environment for the company going forward, while declining to provide guidance. While the company did announce a $500M share repurchase program and noted that Q3 daily active users were up 19% year-over-year to 363M, Snap said its business continued to face significant headwinds in the third quarter. The company said in its investor letter, “We believe that we can be successful in this new operating environment – with elevated inflation, increasing interest rates, and heightened geopolitical tensions – by rigorously prioritizing our investments and continuing to delight our community with our products while driving success for our advertising partners.” It added “While we are facing near-term headwinds to our revenue growth, we remain optimistic about our long-term opportunity based on the growth of our community and engagement. Today, we reach more than 75% of 13- to 34-year-olds in over 20 countries, representing over 50% of global advertising spend.” Snap noted that revenue visibility was incredibly challenging, but did provide some insight to Q4 daily active users. “As we look toward Q4, we are pleased with the growth we have observed in our community, and we estimate that DAU will be approximately 375 million in Q4. Thus far in Q4, we have observed revenue growth of approximately 9% year-over-year. Forward-looking revenue visibility remains incredibly challenging, and this is compounded by the fact that revenue in Q4 is typically disproportionately generated in the back half of the quarter, which further reduces our visibility. Given these factors, we do not intend to provide formal financial guidance for Q4. That said, we believe it is highly likely that year-over-year revenue growth will decelerate as we move through Q4, due in large part to the fact that Q4 has historically been relatively more dependent on brand-oriented advertising revenue, which declined slightly on a year-over-year basis in the most recent quarter. As a result, we have set our internal forecasts based on the assumption that year-over-year revenue growth will be approximately flat in Q4, and we estimate that Adjusted EBITDA would be approximately $200 million under that revenue assumption for Q4. We expect to incur the remainder of the transition costs associated with our strategic reprioritization in Q4 and estimate these costs will be between $20 and $35 million, which will therefore present a commensurate headwind to net income in the quarter.” Snap dropped 25% to $8.03 on Thursday. Advertisers also reacted. “Our revenue growth continued to decelerate in Q3 and continues to be impacted by a number of factors we have noted throughout the past year, including platform policy changes, macroeconomic headwinds, and increased competition. We are finding that our advertising partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital. In some industries where topline growth remains strong, but businesses are experiencing input cost pressure due to inflation, we have observed reduced campaign budgets as businesses seek to offset input cost pressures. In many high growth sectors, businesses are reassessing investment levels amid the rising cost of capital. We experience this on our advertising platform in the form of decreased brand-oriented advertising spending, but also in the form of lower bids per action and lower overall campaign budgets,” the company said in its investor letter.

Meta is set to report Q3 earnings after the bell today. Pre-earnings options volume in Meta Platforms is normal with calls leading puts 5:4. Implied volatility suggests the market is anticipating a move near 11.0%, or $14.52, after results are released. Median move over the past eight quarters is 5.8%. KeyBanc analyst Justin Patterson lowered the firm’s price target on Meta to $175 from $196 and kept an Overweight rating on the shares. shares ahead of quarterly results. Amid mounting concerns on a downturn in 2023, the analyst observes investors are increasingly skeptical of Street revenue growth at Meta Platforms and Alphabet (GOOGL), and are instead focused on capital allocation and expense discipline. While he anticipates flattish-to-low single-digit EPS growth at both companies, Patterson believes progress with cost containment initiatives could reassure investors that 10%-plus revenue growth and high-teens to 20%-plus EPS growth is attainable in a 2024 recovery. The analyst sees more potential upside from Meta given subdued sentiment around metaverse investments.

ANALYST COMMENTARY:

 BofA analyst Justin Post downgraded Meta Platforms. The analyst stated that while his checks suggest that the company’s Q3 results this week will have “stability,” his expectations for Q4 and FY23 have been reduced as advertiser budget cuts early next year weigh on sentiment and create uncertainty following IDFA changes and Reels transition. Post added that he projects only 4% revenue growth in 2023 vs. consensus calling for 9%, and there is some “downside risk” to that view in a recession.

Jefferies analyst Brent Thill lowered the firm’s price target on Meta Platforms. Reels is still a “small contributor today” with a $1B annual run-rate, but his analysis indicated that can flip from a revenue headwind to a tailwind by FY24, Thill told investors. With the recent pullback in shares, Meta now trades at a 40%-plus discount to the Nasdaq, which is “well below” the historical discount, noted Thill, though he adds that the macro impact on ad budgets creates uncertainty and could pose risk to his FY23 revenue estimates.

Wedbush analyst Daniel Ives said “time is ticking” for Elon Musk to get his buyout of Twitter done by Friday, October 28, which is the Delaware Court imposed date as the hard deadline. The “main hurdle right now” is the structure of the financing as Musk continues to seek outside financing to help him close this deal along with current $12.5B debt financing, Ives told investors in a research note. “It’s pretty simple, the more investors that bail on this deal is the more money that Musk needs to contribute and therefore sell more Tesla stock,” he writes. Ives believes Musk might need to sell an additional $5B to $10B of Tesla shares to fund the deal, depending on the financing talks. “This continues to be a brutal situation for Tesla investors to bear the burden,” says Ives. On the Washington Post report of Musk planning to cut 75% of Twitter’s workforce, the analyst says such a move would be “way too aggressive” and potentially set back the core platform for years before the “X App” strategy takes hold.

JMP Securities analyst Andrew Boone lowered the firm’s price target on Snap. The company reported in-line Q3 results after updating investors intra-quarter on revenue trends, though it now expects revenue growth to be flat for Q4, implying revenue will fall later this quarter after it grew 9% year-over-year quarter-to-date, Boone told investors in a research note. U.S. total watch time fell 5% year-over-year and time spent watching Friends Stories continues to be a headwind as competition for both top-of-funnel ad budgets and user attention remains intense, says the analyst. However, Boone says Snap continues to reach 90% of 13- to 24-year-olds in 20-plus countries and remains one of the few scaled platforms where advertisers can influence young audiences.

MKM Partners analyst Rohit Kulkarni downgraded Snap, following the company’s “disappointing” Q3 earnings report. He admits to having overestimated Snap’s ability to show resilience to macro and Apple (AAPL) headwinds in 2022 and Kulkarni now believes that Snap “will have difficulty remaining under control of its own destiny over the next six to nine months.

Originally Posted October 26, 2022 – #SocialStocks: All signs point to Musk’s Twitter buyout closing on Friday

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