Why is Elon Musk threatening to sell 10% of the Twitter stock a big deal?

Of course, this is all speculative and “reading the tea leaves” approach. This is how I rationalise the moves based on my understanding to date:

If we use finance.google.com to look at the average price of the Twitter stock for the past ten years, we find it varies between the 35–45 USD range (predominantly). There was a temporary up in 2021 followed by a sharp fall back into the 35–45 USD range UNTIL the Elon moves started.

The timeline of events is key too.

ON APRIL 4th, the world found out about his 9.2% ownership and excitement around the “realm of opportunities”, and the stock price escalated well above the 35 to 45 USD price. If we match the timeline to the stock price, we can see Elon consolidating and increasing his Twitter holdings between January and 4th April. We can see the stock price circling the 35 USD value in this period.

The reason it stayed flat is simple. No one was aware of Elon’s moves, so the stock price performance was in line with the average performance of the company stock for the past ten years.

Reading the chart movements of what happened on 22nd April 22, we see that the price varies between 47.49 USD and 49.73.

IF ELON BUYS

Now this means a great deal to investors who bought in the 35–45 USD range per share in the past ten years. If Elon purchases the stock at USD 54.2 per share, he effectively gave these investors (who have not seen real growth from Twitter stock) a compelling upside.

Using an example, if I bought 100 shares at 35 USD and sold them at 54.2, I would make a total profit of (54.2 * 100) — (35 * 100) = 1,920 USD. This means that Elon is offering the vast majority of stockholders who bought at the 35–45 USD mark a good out position on a stock that was predominantly flat.

By purchasing the 9.2% of the stock, he got the attention of all of the shareholders of Twitter, especially those that are frustrated with the overall performance of Twitter over the past ten years. This means that with the move of Elon, they have access to compelling short-term growth return.

With the good, there is the bad.

• If Elon buys the stock at 54.2 USD per share, then anyone who purchased the stock in the range 54.3 and above (highest recorded of 73.34) would effectively make a loss. That is the only stockholder negative impact that I can see.
• Also, there is the hypothesis that this board and Twitter leadership would release some magic update/value in the coming months that would revolutionise these performance KPIs. Again following the news and “tea leaves”, I have no reason to believe this was in the cards for the coming six months.

This means by buying the 9.2% Elon:

• He highlighted to the board AND THE WORLD that he is serious in his intent.
• He locked in a ceiling price that prevents NEW SHAREHOLDERS from buying and pushing the prices higher than 54.2. This is because Elon Must immediately said he would not pay more than 54.2 per share (so there is no sense for any investor to buy above that price. This means that the stock will not rally as people want to profit and not lose money. This is smart (actually a master move I never saw before. I am sure it happened…..but this was my first time….)
• Highlighted to the shareholders that are long frustrated that they have a way out
• Brought enough focus on the insufficient and sub-par way Twitter is managed. Check out my research at https://bit.ly/3M9iWrw.
• This is a master chess move where he managed the market, his costs, and the company’s leadership he wants to buy SIMULTANEOUSLY. IMPRESSIVE!!!!

IF HE PULLS OUT FRO THE DEAL / SELLS

If he pulls out, this is what would most likely happen:

• The Twitter stock price will return FOR SURE to the 35–45 USD range. (Best Case)
• Most likely, the impact of losing the high visibility and focus of Elon, who has a track record of exceptional performance on most of what he does, e.g. SpaceX, Tesla, PayPal etc., would crash the stock to the range 25 USD if not lower. This would create all sorts of legal issues for the current board, leaving Elon to find an alternative purchase. The highest negative is on the current leadership and all current shareholders.
• It will build speculation on Elon’s next move leaving Twitter to pick up the pieces in a situation where their under-performance was highly evidenced.

Hope this helps. If I am missing anything I would love to hear more on this and adjust my understanding further.

Let me know what you think!. I believe in productive discourse and welcome opportunities to refine my understanding through discussion. Comment in the comments area below or reach out on hi@andremuscat.com