Musk’s Twitter Fans Find Value Analysts Don’t See

(Bloomberg) — Elon Musk and an army of individual investors are now going head-to-head with Wall Street analysts in a contest over Twitter Inc.

Retail investors helped fuel record trading volume Monday for Twitter, with more than 260 million shares changing hands, after Musk disclosed a 9.2% stake in the social-media company. Twitter ranked as the most purchased stock by Fidelity Investments customers as the stock had its biggest rally since the day the company went public in 2013.

The gains continued on Tuesday, after Twitter said it would appoint Musk to its board of directors, sending shares up 8%. In a regulatory filing, Twitter also said Musk cannot own more than 14.9% of the company while he serves on the board and for three months after he vacates the position.

Buyers are betting Tesla Inc.’s chief executive officer can jumpstart Twitter by virtue of his clout as the biggest shareholder and as an influential user on the company’s platform, where he has 80.4 million followers. For now, though, they’re buying on faith.

Analysts, in contrast, have been skeptical: They’ve slashed their aggregate price target by more than a third since October and just nine of the 42 brokerages tracked by Bloomberg that cover the stock recommend buying it. The shares have tumbled from their 2021 record as investors balked at a combination of a high valuation and potentially disappointing user growth.

Monday’s 27% surge is “a potential over-reaction” given that it’s not clear why Musk made his investment, the stock is expensive and investors have yet to see substantial progress toward Twitter’s revenue and user targets, Brent Thill, an analyst at Jefferies, wrote in a note. Separately, MKM Partners downgraded the stock in the wake of Monday’s advance.

Before Monday, Twitter shares sat at 50 times profit projected over the next 12 months, more expensive than about 97% of the S&P 500 Index including Amazon.com Inc. and Nvidia Corp., according to data compiled by Bloomberg.

Read more: Wood Sees Potential for Twitter Shakeup After Musk Takes Stake

Activist investors usually step in when they see a company as undervalued and seek changes that will boost the share price, brandishing the ultimate threat of a proxy fight for control of the board. Musk disclosed his stake using a form for investors who don’t plan to seek a change of control, and in any case the stock isn’t cheap, so he doesn’t seem to be following the standard activist playbook.

But nothing stops him from sharing his opinions about how Twitter can be improved, and he’s already doing that. He’s polled users on whether they want a button that would allow editing of tweets, and Twitter CEO Parag Agrawal responded by calling it important and urging users to “vote carefully.”

Responding to a user’s post, Musk also said that crypto spam bots are the “single most annoying problem” on Twitter.

“Musk is certainly putting a lot of focus on the stock and getting people talking, and right now people are excited,” said Jon Maier, chief investment officer at Global X, which sponsors the Global X Social Media ETF.

Twitter stock has been a long-term underperformer, returning 8.1% a year since its initial public offering versus 20% for Facebook owner Meta Platforms Inc. For Wedbush Securities analyst Daniel Ives, it’s only a matter of time before Musk starts agitating for changes.

Musk joining the board “will lead to a host of strategic initiatives which could include a range of near-term and long-term possibilities out of the gates for the company still struggling in a social media arms race,” he wrote. “Its time to get out the popcorn.”

Tech Chart of the Day

The rally in tech stocks may just be getting started. The Cboe Nasdaq 100 Volatility Index, which measures expected swings for the Nasdaq 100, has fallen to its lowest level since mid-January. Meanwhile, realized volatility for the Nasdaq 100 over the last 30 days has only just started to ease. As a result, the spread between the two — which is generally negative — has ballooned to the most positive in a year. Similar occurrences over the last three years have only seen the spread narrow again once the Nasdaq 100 experiences an extended rally.