Jefferies Equity Research Analyst Brent Thill joins Yahoo Finance Live to discuss the expectations for Elon Musk’s Twitter takeover amid accusations that the social media platform has made against him.
Video Transcript
BRIAN SOZZI: Elon Musk's Twitter saga continues today after claiming Twitter's legal team accused him of violating a non-disclosure agreement when tweeting about the company's automated users review process. This is just the latest in a string of controversies surrounding Musk's potential buyout of the social media platform.
Joining us now to discuss is Jefferies analyst Brent Thill. Brent, always good to see. You really enjoyed your note out on this. You mentioned in that note, Brent, that Musk might be trying to negotiate a lower price for Twitter. So my question to you is, inside of this bear market in tech, what is fair value for Twitter?
BRENT THILL: Yeah, I think right now the whole tech market's in a massive selloff. And when he struck this transaction, obviously we saw signs of weakness for the tape. But ultimately, no one believed it would get as bad as it's gotten. So right now we're seeing stocks trade at single digit multiples on EBITDA, in low double digits on earnings, which is kind of unheard of that we've seen in the last decade for tech.
I mean many have said the downside for Twitter effectively could be in the low $30s if this fell through. And clearly, we believe he's just trying to negotiate a lower price. There's been all kinds of public filings that have said that the bots are less than 5% of users. That's in the filings. And so I don't know what the controversy is there. The only way you could spin this is that he's trying to renegotiate a lower price based on what's happened to the overall tech market.
Our belief is we're not done with the pressure on tech. We still think there's downside relative to historic multiples. And so again, I think what we've seen is just pretty violent moves on the up and violent moves on the down. And even while we all think if he walked away, it would go to the low $30s, in this tape, I wouldn't rule out anything, because we've seen everything overshoot even on the down relative to what we consider more bearish levels.
So really unclear and again, I think we've never really seen a situation like this where a takeover candidate is publicly commenting on data. So this is just, it's just been a roller coaster. Obviously, many investors are at this point, viewing it as uninvestable at this point, given it feels like he's ready to walk away.
JULIE HYMAN: And Brent, it's Julie here. Given what you're saying and given the stock action that we've seen, is $54.20 overpaying for Twitter?
BRENT THILL: I think at this point, given what's happened to the tape, the multiple, we all think the multiple's outrageous relative to historic M&A in tech. But given what's happened in the short term with the tech market, I think ultimately many would say yes. Now if he can prove that this internal review of the users is actually, there's a higher bot count, then perhaps he could say, well, I'm coming back to the table and renegotiating down $10, whatever the number is. I'm making the number up.
But the point is, I think ultimately valuations have all gone lower and we continue to be in the slide. So $54.20 is probably again, the higher end at this point. I think many of us thought when the deal was going through that we'd see somewhere in the high $50s. So I think everyone's kind of bracketed the transaction somewhere between the high $50s to low $30s. And again, it really depends on the shape of the curve of their overall business, of the overall market and the tape, and the tape has gotten violently negative since this happened.
And so it's not a shocker to see him trying to walk things down. Again, he says he's committed, but clearly, when you have public filings that all you have to do is to a quick search, you can find the bot statement inside their filings, they've commented, it's less than 5%. So I don't understand why you would put it on hold for that. Clearly, everyone thinks that there's something deeper going on that we can't see. And that's what he's trying to do, is throw up a flare so that he can stall the process out.
BRAD SMITH: And so with that being the case right now, if by happenstance this does get thrown aside and it doesn't go through, at least with Musk as a buyer, are there other companies that you imagine could kick the tires on a lower priced deal for Twitter?
BRENT THILL: Well, we know historically there have been a lot of tech companies that have been interested. Salesforce kicked the tires and investors are like, get off the parking lot, we don't want you in this car! And that was a pretty clear statement from salesforce.com shareholders. I'm not saying Salesforce will do it.
The point is, there's I think a lot of potential strategic acquirers. The second camp you have to think about is the billionaire club and who are the other potential buyers with another community of buyers. I think private equity certainly could look at this. I mean, there's a number of camps that could do it.
I think the challenge right now is, there's so much inventory in tech on sale, and we're likely to get worse on fundamentals than better as we head into a recession. Ultimately, I think many investors believe again, and Jefferies firm view is, that if the economy is slowing into '23, that ultimately, we're going to get a better shot on goal, if you will, on the price. So I don't really see anyone kind of waiting ready to jump out of the bushes and say I want it. That's not what we see right now. And clearly, I think during the process that went through, the fact that no one came to save them on the $54.20 tells you a lot.
There wasn't really anyone else out there that was willing to make the move. So certainly, again, assuming the deal falls apart, stock goes to low $30s, we'll see at that point. Again, I don't see anyone at this point. And certainly given the macro environment, why not wait? Why not give yourself six to nine months seeing what's happening with advertisers in a recession? And we know that the first dollar is that gets shut off in a recession are ad dollars. And that's Twitter's, that's Twitter's revenue stream right now.
BRIAN SOZZI: Brent, how much damage is this saga doing to the fundamentals of Twitter? Let's look at a product person inside of Twitter. How can you feel motivated to go to work every day and create some form of interesting new product if you don't know you won't have a job in six months?
BRENT THILL: Exactly. I mean, you nailed it. I mean, it's, I can't imagine. It's kind of like living in a washing machine right now. You're constantly on a spin cycle. And at this point, I think, I guess the other side of this is, that we're seeing layoffs in tech, we're seeing valuation downside. So we're seeing a lot of that in other places, but I think this is pretty severe in terms of the sentiment.
We've already seen a number of senior executives leave. We've had a couple of our companies that we cover inside the rest of the tech industry hire executives out already. So I think you're already seeing execs check out. They're like, I don't want to, I don't want to be in for the spin cycle. So this is only going to make it worse.
And when you look at the comments that he says where he wants to get the company, like, what I don't get, is he lays out this incredibly bullish outline and then says the deal's on hold because of this? Like, that's what I think is so counter. And I think it's really unproductive for the morale and for the team inside this company. I can't imagine going through that. Certainly wouldn't go through it. I wouldn't stand for it, because if you look at these statements that he's made about trying to get the subscription business and the ad business at a certain level, the number of users,
I mean, all these targets, they're never going to hit it. There just never going to hit it. And we published a note highlighting why. You look at these subscriber numbers for a new service, I mean, Disney Plus is like, you know, again, we've drawn the comparison that they're not even at the target, and they're Disney.
So these big iconic brands, I think this is going to be very, very difficult both from a perspective of trying to meet the goals if he wants to meet them, and then secondarily right now, the more he stalls on this, the more morale gets tough, the product quality has already been challenged. We've been talking about this for years.
The Twitter product is not where it needed to be, and that's why he's involved. And we think he can work wonders. So I'd say, look, let's get rid of the sideshow, let's just keep moving forward, try to keep this on track if he really wants to get this done and try to get this deal closed so that they can move on to the next chapter.
BRIAN SOZZI: Brent Thill, Jefferies analyst, always good to see you, great insights, we'll talk to you soon.