The Briefing

By Martin Peers

July 17, 2023

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Elon Musk’s tweet early Saturday morning that Twitter is “still cash flow negative”—as in spending more than it is taking in—was, by Musk standards, a bit of a yawn. We’ve heard so much about Twitter’s precarious financial position over the past few months—as Musk acknowledged in the tweet, it’s due to both a roughly 50% drop in ad revenue and a “heavy debt load”—that his comment barely constituted news. But if you think about it, it is remarkable that after shrinking Twitter’s workforce by 80% and stiffing landlords, other vendors and even laid-off staff, the company is still not profitable.

But that’s what happens when you borrow $13 billion with floating interest rates, and those rates are skyrocketing at the same time that your revenue is nose-diving. The annual interest costs on the debt he took on to buy the company are likely now around $1.4 billion currently, given that it was taken out at margins of as much as 10 percentage points above benchmark interest rates like this one. On top of that, even a quarter of Twitter’s pre-Musk operating expenses amounts to about $1.2 billion. On the revenue side of the ledger, if advertising is running at half of Twitter’s 2021 number, it’s around $2.25 billion. You can see the problem. And given the launch of Meta Platforms’ Threads, which is almost certainly drawing some usage away from Twitter, things could even get worse. It’s little wonder that at least some of Musk’s backers in the Twitter buyout are writing down their stakes significantly—including Ark’s Cathie Wood, as The Wall Street Journal reported today.

Barring a remarkable (and unlikely) near-term return of advertisers, what can Musk do? The only logical solution is to pay off at least some of the debt by either putting in more money of his own or finding a group of investors to do the same. We know he’s explored different versions of that idea without pulling it off, at least so far. And on Saturday, Musk seemed to rule out getting together a group of loyalists to buy back the debt, an idea tweeted by a fan. Musk argued that Twitter needs to start generating cash first, implying that investors won’t put up more money without seeing some progress. But that contradicts a theme we keep hearing—including from Wood in today’s Wall Street Journal report—that Musk’s backers remain convinced of the long-term correctness of his Twitter vision. Wood, in fact, said she wanted to buy more Twitter stock at the reduced valuation levels. (On a related topic, our scoop today about SpaceX’s revenue shows why Musk engenders such intense support from backers.) Why not take more advantage of those supporters?

Perhaps Musk should simply sell a few billion dollars of new Twitter shares at a sharply reduced valuation level and use the money to pay off the costliest bonds. Yes, he’d be severely diluting his own shares and those of everyone else. But that would solve some of Twitter’s short-term problems. For one thing, he might be able to invest money in hiring more engineers so he can fix the problems with Twitter’s technical infrastructure. That in turn could change the overwhelmingly negative narrative about the company right now. Otherwise, Twitter is stuck in a situation like that facing many money-losing startups, which don’t want to raise money at a lower valuation than their 2021 peak but can’t afford not to. Those startups will have to eventually bite the bullet on valuation. The same applies to Musk’s Twitter.

Not Just Yet

The strength of the U.S. dollar over the past year has worked against big tech companies in the U.S., who generate a good chunk of their revenue overseas. In fact, the impact has been so pronounced that many companies have highlighted in their last few earnings reports how much better revenue growth would have been without foreign exchange rate fluctuations. Luckily for them, there may be some relief on the way.

Last week was the dollar’s worst week since November, according to Bloomberg, as markets grappled with the possibility that receding inflation may even soon trigger some interest rate cuts. So should investors in U.S. tech firms expect to see the impact of a weaker dollar in the June-quarter earnings season, which kicks off with Netflix’s report on Wednesday?

Well, no—at least not yet. In the second quarter, the dollar traded on average at roughly $1.03 compared to a basket of other widely traded currencies, according to MarketWatch. That’s almost exactly where it traded, on average, in the same period last year. That said, if the dollar keeps down the path it’s currently on, third-quarter revenue will likely get a nice lift. The dollar was trading at around 99.9 cents as of this evening, based on the same index, much lower than the $1.08 it traded around in the third quarter last year, on average. Growth should get easier for big tech firms, but investors will still have to wait a few months to see it.—Akash Pasricha

In Other News

Beauty company Oddity, which filed for an initial public offering in June, raised the price range at which it plans to go public, giving the firm a new valuation of almost $2 billion (more here).
Temu, an e-commerce retail company, is accusing rival firm Shein of breaking antitrust laws in the U.S. (more here).