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Introduction
This article represents my thoughts on Elon Musk buying the famous social network Twitter that he said he didn’t want to buy after putting in an offer, then deciding he did want to buy it. As such, I consider it a fluid situation and don’t know where the situation will conclude; Musk can be a fickle individual, to understate it.
Nevertheless, I wanted to submit this essay because it lines up with my theme of entertainment as a useful business model for companies. It seems particularly appropriate in this case.
Tesla And Twitter
Tesla, Inc. (NASDAQ:TSLA) CEO Elon Musk is buying Twitter, Inc. (NYSE:TWTR). As a Tesla shareholder, I was of two minds about his pursuit of the famous social media concern. I still am, considering that it probably would be better for him to focus on Tesla, but I obviously don’t have any pull with the board. That’s okay, though, since after contemplating the latest headlines about the capricious chief executive deciding it was better to simply purchase Twitter and not fight the previous agreement, I’ve come to the conclusion that Musk may have an opportunity here if he is willing to go a little further.
What Musk should do is this: create a media empire based on filmed-entertainment, distribution platforms, and physical media/merchandise.
Sounds crazy, perhaps; or does it?
Here’s the crazy part: Musk should be focusing on optimizing his electric-vehicle (“EV”) business model, with the priority being battery storage, of course.
But he isn’t. And that’s just the way it is. So, in my mind, if he embraces Twitter as a stepping stone to a Hollywood business model, one that can be included in his portfolio of companies, perhaps it will create more value for his overall portfolio and allow him to further the interests of Tesla. It certainly would have great marketing value.
Let’s face it: Musk is a showman. He wants to be a mogul. Everyone has an idea for a script, or wants to have a cameo in the latest tentpole; Musk is no different. He’s hosted Saturday Night Live, and he’s appeared in a Disney (DIS) Marvel film (Iron Man 2).
Musk’s Twitter account by this point has become legendary for its dispatches of pithy commentary. He’s never one to shy away from an opinion. That can lead to awkward situations for shareholders of Tesla; as an example, in 2018, Musk got in some trouble over a putative desire to take his EV company private.
Yet, if he decided to start making movies and other forms of entertainment, it might satiate a lot of his need to vent in public. He could instead invest in storytelling as an asset, and use Twitter as a platform for promotion and distribution.
Recall that former Disney CEO Bob Iger explored the idea of purchasing Twitter when he was the leader of the entertainment conglomerate. Consider the context of the time: ESPN was becoming an issue with cord-cutting consumers contributing to the sports channel’s linear decline in subscribers. Disney knew it would eventually need to create a direct-to-consumer platform that could generate recurring monthly subscription revenue and compete with Netflix (NFLX) and other streamers.
I wasn’t in favor of Disney purchasing Twitter, as I thought it was too expensive for the company; instead, that money could have been used to bolster Disney’s own ecosystem. Twitter, on the other hand, I always felt should have been making movies and television shows so that it could diversify and become more Disney-like. The key point here is that Iger seemed to think that Twitter had the intrinsic capability of converting itself into a platform for content distribution.
That potential still exists, and perhaps Musk will finally be the person to see that, given his propensity to not be just one type of CEO: he makes eco-friendly vehicles, he invests in space exploration, he sends satellite trains in the sky to deliver Internet access…this can all lead to a conglomeration effect that can cross-promote a Twitter/Tesla ecosystem.
Of course, a filmed-entertainment studio will take some priming. If we look at Twitter’s current ability to finance movies and other content via existing cash flow, we see that it would be challenging. The 10K from back in February (page 65) shows that net cash from operations in 2019, 2020, and 2021 was $1.3 billion, just under one billion, and over $600 million, respectively. Capital spending in those same respective years was over $500 million, $870 million, and one billion dollars. Twitter also has about $5 billion of long-term debt. As this SA article from August mentions, there is an argument to be made, aside from the Musk angle, that the current business model is a sell based on declines in free cash flow as well as a challenging advertising market, even as user activity increases.
Twitter obviously has opportunities to improve its business prospects – a lot of them, apparently. The current recessionary environment isn’t helping, and one might assume that, as we climb out of it over time, Twitter will be able to adjust its advertising-revenue potential upward and reap cash-flow benefits down the line.
Nevertheless, Musk is buying Twitter now, so if he were to pivot the company into a media model, he would have to do what he essentially did to buy the business – count on a consortium of investors to get things going. Look at, as an example, the willingness of Larry Ellison to commit perhaps even a billion bucks in a Twitter transaction, as mentioned in this SA item about the text-message trail involving this topic.
There’s also his considerable wealth. Tesla shareholders were rightly concerned when the whole Twitter thing first came down – how would that affect his personal sales of Tesla shares? Well, we know that, just recently, he sold $7 billion related to the potential Twitter transaction, as described here.
Sales of Tesla by Musk, although not a welcome event for many with interest on the EV side, might have a silver lining if he were to do the filmed-entertainment pivot, because conceptually, it would merely be him reallocating his net worth in a diversified manner, even a synergistic manner, that could benefit his shareholders. Yes, I write synergy, because recall that Musk actually is already involved in Hollywood in some sense – a couple years back, he and Space X were involved in the development of a Tom Cruise film to take place in space. I have no idea how far along that film is in the development stage, or how alive it is right now, but it simply goes to show that Space X can be a label/studio for a Musk media empire that uses Twitter to promote a content slate – leveraging all that user data to make the ROI as efficient as possible, of course – that includes product placement of Tesla vehicles and characters using Internet feeds powered by Starlink satellites (and if that space film involves aliens by any chance, I’m sure some of the rebels on Earth can use Boring Company flamethrowers to fend them off).
So, Musk can attract investors to help take care of the Twitter cash-flow problem. Could he also acquire a film studio?
Those who have read my articles know where I am going with this, but I have to say, you’ve got to admit a smaller-cap-type purchase of something like Lions Gate Entertainment (LGF.A, LGF.B) would be both economical and useful for a company like Twitter (I own Lions Gate, of course, for the buyout thesis). Lions Gate would offer immediate access to Hollywood, and considering it’s a studio that for some reason has been on the block for too long a time, perhaps Musk would be insightful enough to give CEO Jon Feltheimer the price he wants so Twitter could finally become what I believe it is destined to become. Hey, if Musk can randomly one day decide to buy Twitter for $44 billion, I can’t see why he can’t buy a studio for several billion.
Musk’s use of Twitter is often controversial and ill-advised, and as a shareholder, I wish he would use it less and just work on EV, but I’ll say this: he has a large following, and he knows what Twitter can do. He definitely has the innovation gene within him, and I could see Twitter morphing in part into something that could promote efficient collaboration on content development. It’s been tried before, most notably with Amazon (AMZN) Studios and that organization’s original mandate to, in part, create a content slate via an open-submission policy on its very own ad hoc social network. More recently, an app called Daisie, backed by actress Maisie Williams, tried to do the same thing: democratize Hollywood creativity by using technology to bypass the cruel filtering system in L.A. It didn’t work out. Could it work with Musk?
It might. He might be unique enough to accomplish such a task. Posting Twitter messages that contain pitches and the like is certainly not new, but a formalized setting meant to capture and evaluate such offerings – and using artificial-intelligence analysis to identify marketable concepts, something Musk might find intellectually appealing – would be a novel evolution of the social network.
All of this might feed into his concept of the X application. X is supposed to represent “everything,” so I suppose content creation would have to be part of it. Imagine: users help to generate content, then help to pay for it through crowd-funding, then stream it through Twitter (after being activated to want to see it via marketing on the platform), and use Twitter to shop for merchandise associated with it. Is that the eventual meaning of X? It’s an open question.
Conclusion
These are my thoughts as I contemplate the whole Twitter-Musk deal. Musk is a business leader who actively cultivates a celebrity around his image, a mystique to the man that seems to work – i.e., when we buy Tesla, are we betting on EV models or Elon Musk himself? In many cases, the latter is cited as the top reason. (For me, it’s a little of both, but I tend to emphasize the long-term impact of EV.)
As such, he’s a tech titan who may not be cowed by the idea of entering the Hollywood arena. Many tech leaders are clearly frightened by Hollywood and end up simply hiring industry insiders to run a content slate (or simply avoid investing in storytelling altogether). They don’t demand commercial content that will sell; instead, they are simply content with propagating relationships with the movers/shakers who set up the teams that point the cameras and shoot…and in the end, throw billions away that might have gone to dividend payments or share buybacks.
Anyone who has read past articles of mine know I am going over old territory here, but it is a theme I come to time and time again…that storytelling and IP and filmed entertainment is an investing theme not only for shareholder portfolios in a direct sense (e.g., owning Disney), but also for CEOs looking to diversify their top lines. Recently, I wrote another memorandum about Meta Platforms (META) and its own intrinsic reasons for being in show business. Elon Musk and Mark Zuckerberg, if nothing else, are both showmen at heart…
The Stock
Twitter stock, at this point and as far as I am concerned, is a trading vehicle in the hands of those who attempt to profit from short-term price noise trades. It is essentially a memory as a public vehicle.
Tesla, on the other hand, is very much alive and is a solid bet on EV. The stock is currently rated badly on the valuation scale at SA’s quote system. The yearly range of the stock is roughly $200 versus $400. Price as of this writing is just under $240.
Market volatility suggests the stock may trend lower short-term. Indeed, this stock appears to be expensive.
Besides those two issues, there’s the whole issue of the Twitter deal affecting the shares, as it may force more sales on the part of Musk. I own Tesla and have been buying small amounts the last few weeks as I add to the position and slowly improve cost basis. Be aware that the bear market probably isn’t going away anytime soon, so use pullbacks to add to Tesla if you believe in its long-term future. I do think the company will do well over time with EV sales and believe the stock will be higher in the future. I am a long-term owner at this point.
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