• The 10Forward (​see here​) from Star is an unusual report that encourages the reader to influence the outcome and is designed to ignite thought and debate as opposed to a turgid set of predictions.
• ​Star​ is a global technology consultancy that defines, designs and develops digital solutions and connected experiences for disruptive startups and ambitious enterprise
• RFM has worked with Star numerous times over the last 5 years and moderated the ​10FWD launch​ event a few months ago.
• Its latest report is a 10-year vision laying out four future scenarios shaped by the interplay of technology, society and business and how they will impact the automotive, financial services and healthcare sectors.
• 10Forward features interactive elements, including quizzes and a virtual world where readers can click around to uncover various sub-scenarios. This immersive experience offers personalized insights, deepening readers’ understanding and visualization of potential futures.
• The 4 socio-economic outcomes are portrayed as graphically engaging worlds where technology innovation and prosperity is either high or low and all of the combinations in between.
• The result is a very wide spectrum varying from the Mad Max-like Wastelandia to Ecolysium which is a utopian outcome where technology innovation has substantially improved prosperity and quality of life for everyone on the planet.
• None of these worlds are explicit forecasts but extreme examples of what the world might look like in 10 years and within each scenario the impact on the automotive, financial services and healthcare sectors are examined.
  • Financial services which is going to be an important sector whatever the socio-economic outcome is going forward.
  • The banking sector is globally slow and inefficient and with a heavy regulatory environment, change comes slowly.
  • However, it is clear that Blockchain has a role to play in all scenarios as it can deal with scenarios where there is no trust or in enabling fractional ownership to improve financial inclusiveness.
  • Fintech has changed beyond recognition over the last 20 years and there is every reason to think that there will be even more fundamental change over the next 10.
  • Healthcare varies very widely as one switches between the four socio-economic outcomes.
  • In Ecolysium (utopia) all patient data is secure, private but also completely interoperable meaning that the best diagnosis and therapy can be delivered by having a complete set of consistent data.
  • Meanwhile, at the other end of the scale, data is fragmented and unreliable with unregulated procedures being carried out at the patient’s risk.
  • However, in every outcome, Healthcare will become far more digitised than it is today with one of the greatest opportunities lying in remote monitoring allowing early detection and mitigation of most of the big harms in the developed world.
  • Automotive and Mobility which is already in the throes of great change switching from fuel-powered transport to electric.
  • Electrified transport features heavily in all of the outcomes but there are different grades of public transport depending on one’s social status in Neotropia to a completely integrated transport system of autonomous, silent and clean transport options in Ecolysium.
  • Only in Wastelandia is fuel envisaged to persist in the long-term but even there, when EVs become much cheaper to buy and maintain, it is likely to penetrate into the lowest income groups.
  • This is all predicated on a plentiful and clean supply of electricity which is the one thing that may well delay the penetration of EV in Wastelandia even if the EV is nominally cheaper.
  • The other is cost as EV’s of a similar trim level and performance are still more expensive than their petrol counterparts and more troublesome to own.
  • These issues are likely to be overcome with time and so the transition to electrified transportation is still very much the future, but it might take somewhat longer than many expect and that this report envisages (10 years).
• 10FWD is not a linear report but has been gamified in that the reader or the player can choose the outcome that most closely matches their view and then drill into the specific sectors and see how the themes that drive each sector are impacted.
• The report is graphically rich and largely succeeds in being more engaging than typical research and as a result keeps the themes at a fairly high level.
• 10FWD equips you with the tools and framework to navigate uncertainty and make strategic decisions that position your organization for long-term success. ​Download the 10FWD playbook​ and discover more trends and actionable recommendations that will shape our world in the decade to come.

• Meta’s proposal to charge $10.5 per month for Instagram looks deliberately priced to fail creating a strong incentive for users in the EU to explicitly allow targeted advertising which will also test just how valuable the service is to its users.
• Meta Platforms is currently embroiled in negotiations with the EU with regard to its business model where the regulators’ view is that just because users clicked “Agree” to an agreement, this does not give Meta the right to target them with advertisements.
• This is an ongoing issue as Meta was fined €390m by Ireland’s Data Privacy Commissioner for precisely this activity and was told it had to think of something else.
• RFM research’s monetisation model for digital ecosystems describes three monetisation methods which include hardware, advertising and subscription.
• Advertising and subscription are mutually exclusive and the option for users to choose one or the other is now commonplace across many types of digital services.
• RFM Research also conducted a study in 2018 which examined the viability of digital ecosystems switching from advertising to subscription as their source of revenue (see here).
• The results of the study indicated that while X and Snap could probably make the switch without risking damage to their revenue base, the same was not true for the larger players such as Google and Meta Platforms.
• This is because although they generate an average revenue per user (ARPU) of around $3.00 – $3.60 per month, the distribution of ARPU within the user base is very large.
• For example, even though the USA makes up a small portion of the user base, it often accounts for as much as 50% of revenues indicating that US users generate far more advertising revenues per user than non-US users.
• This creates a pricing problem for subscription because in order to ensure that revenue is not lost, the price would have to be so high that no one would ever pay it.
• The $3.00 – $3.60 ARPU includes all of Meta’s properties and so it is easy to deduce that ARPUs for Instagram in the EU are likely to fall well short of $1 per user per month.
• Hence a price of $10.5 per user per month represents a price increase of more than 950% and I am pretty certain that no user in the EU will be willing to pay it.
• I suspect that this is precisely what Meta Platforms is aiming at as I think that it has any serious intention of changing its business model.
• Instead, in order to keep the regulator happy, it provides an option that no one will want, and assuming that the users still want to use Instagram, will sign up for targeted advertising in a way that satisfies the EU.
• The risk of this strategy is that users decide that Instagram is actually not that important and stop using it entirely although its engagement and user metrics indicate that this is a very small risk.
• Instead, what I would expect is that Meta makes this offer and almost all of its users sign up for targeted advertising and life returns to normal.
• Hence, I don’t think that there are any meaningful implications from this issue although there may be another fine in the works for infractions that Meta may have committed in the past.
• Meta looks on track to meet expectations this year which means that the valuation has recovered and that the best of the stock’s excellent performance in 2023 is now behind it.
• There are plenty of other places to look.

• Meta reported results that were better than feared, announced an efficiency drive as well as a $40bn share buyback which was exactly what investors wanted to hear but I suspect it could do far more.
• Q4 2022 revenues / EPS were $32.2bn (down 4% YoY) / $1.76 compared to forecasts of $31.7bn / $2.24.
• This indicates that Meta’s properties are faring better than its smaller competitors as the number of users is still growing at 4% YoY and engagement with those properties remains strong.
• At the same time, the company reduced its estimate for 2023 expenses to $89bn – $95bn ($92bn) down from $94bn – $100bn ($97bn).
• To mollify the market further, the company has also reduced its capex budget by $4bn and increased its share buyback program by $40bn.
• This strategy has worked as the shares rallied by 20% in after-hours trading to add to their already excellent run in 2023.
• This is an improvement but still represents a small fraction of what could be achieved if Mr Zuckerberg really wanted to put the pedal to the metal.
• Mr Zuckerberg is using these results to highlight that 2023 is going to be a year of efficiency but there is far more that he can do beyond cutting expenses by a measly $5bn.
• Meta Platforms spent a lot of the conference call touting its excellence in AI, but this has yet to translate into any return for investors.
• All through the good years Meta Platforms loaded up with content moderators because its machines were not good enough to effectively moderate content.
• Now that its AI is helping advertisers improve their conversion rates on Reels, attention should be turning to content moderation because this is how real efficiency can be achieved.
• If what Meta says about its AI is true, it should now be in a position to start shedding all of the staff that are now surplus to requirements which I suspect is a very large number.
• Based on its hiring between 2017 and 2020 when its AI was not up to the job, I suspect that 30,000 or more of its personnel could be removed with no meaningful impact on the Meta Platforms’ social networking properties.
• Headcount is still 86,482 meaning that there is space for a 35% headcount reduction from here with those savings flowing directly to the bottom line.
• This is a meaningfully lower cut than Twitter has made, and yet the service is still running with no noticeable differences.
• However, even with the meagre cuts that have been put through, things look a little better.
• If revenues grow by 5% to $123bn (generous) then with OPEX of $92bn, EBIT would be around $31bn.
• This would give $24bn after tax or $8.88 per share in 2023 which after last night’s rally puts the shares on 20.6x 2023 PER.
• In my opinion, this is too high for a company that will report flat earnings in 2023, but clearly, the voting machine of the short-term market is against me.
• Unless something really goes wrong, it looks like the trough multiple for this stock will be around 20x meaning that there could be a lot of upside if Mr Zuckerberg decides to turn his company into a cash machine.
• I don’t think he is likely to do that, and so further upside is likely to require multiple expansion which is a big ask in this market.
• I would not chase Meta Platforms here.

• Rotten results highlight that many social media companies are structurally unable to make money because they are massively overstaffed as the benchmark of Twitter seems to indicate.
• Q4 2022 revenues / EPS were $1.3bn / LOSS $0.18 broadly in line with consensus at $1.3bn / LOSS $0.20.
• The real problem was the outlook for Q1 2023 where the company said that revenue in Q1 2023 was already down 7% YoY and is expected to fall by 2% to 10% YoY in Q1 2023.
• This was an odd admission as the company declined to give any guidance at all in its press release which is just another sign of the haphazard way that this company is run.
• Furthermore, most commentators will point investors to the adjusted EPS which removes the impact of share-based compensation from the calculation.
• While I am no fan of the way in which share-based payments are calculated, these need to be accounted for because while they are non-cash, they lead to share dilution, cost the shareholder value which needs to be reflected in the profitability of the company.
• Snap does generate cash and has $3.9bn of cash on its balance sheet meaning that it is a going concern, but attention should now turn to its chronic lack of profitability given that it is clearly ex-growth.
• The idea for these sorts of companies is that they have to grow very quickly to grab a market position and while they are doing that they burn a lot of cash.
• However, once they become mature, operating leverage allows margins to increase substantially creating a cash machine that more than justifies the investment that initially went into it.
• Companies like Snap, Pinterest, Twitter and so on took the money from investors while they were growing fast but then forgot to generate a return when the market began to mature.
• This is why their valuations have cratered and why they will not be going anywhere until managements decide to act.
• Now we are in a full-blown economic downturn where the revenue profile of these companies will behave in line with the economy rather than the emergence of a new secular trend.
• Consequently, these companies should now be spewing out cash not still losing money and diluting existing shareholders.
• The problem for these companies is the precedent that Twitter has recently set after headcount was purged by Mr Musk.
• Twitter’s headcount is down by 50% – 70% but the service is still functioning and hardly anyone has noticed a difference.
• Twitter proponents will point to the recent outage and the fact that R&D cuts take some time to manifest themselves in weaker products as evidence that the cuts have hurt the functioning of the company.
• However, I think that everyone suffers outages from time to time and it has been a long time since I have seen any new R&D-driven features appear on Twitter.
• At the same time engagement with the service has increased significantly, meaning that with a 70% headcount reduction, Twitter may now be cash positive.
• This raises the question as to whether other social media companies like Meta, Pinterest, Snap and so on are also substantially overstaffed and whether their financial woes could be fixed with large headcount cuts.
• Meta has spent the last few years recruiting content moderators like crazy because its AI has not been good enough to do the work of humans.
• Although revenues are struggling, engagement with Meta’s services continues to be strong and so I suspect that if it was to really take the knife to the fat, a lot of cash could be generated without harming the underlying business materially.
• This would be a much better way to raise money to invest in the Metaverse because, at the moment, it is shareholders who are footing the bill as EPS is likely to decline again this year.
• Meta is still comfortably profitable and generates a lot of cash, but I suspect it could generate far more if Mr Zuckerberg decided to run the company efficiently.
• While there is a lot of upside in these companies should they be run for shareholders rather than the employees, I don’t think the situation is nearly serious enough to shake management teams into action.
• For example, it took Ericsson to be on the verge of bankruptcy before its controlling shareholders were forced to act and I suspect we may see a similar situation here.
• Hence, I do not like the recovery story for social media and would continue to avoid it as large jumps in profitability seem to be very far off.

• Netflix announced good results at the same time that its long-term founder and CEO stepped down to be replaced with two co-CEOs which is never a good idea.
• Q4 2022 revenues / EPS were $7.85bn up 5% YoY (constant currency) / $0.12 below forecasts of $7.85bn / $0.5 but critically subscribers positively surprised.
• During Q4 2022, Netflix added 7.7m subscribers compared to the 4.5m that it had forecast due to a good slate of programming but also I suspect as a result of the cost of living which is keeping people at home more than before.
• The cost of Netflix for a month is not far away from a round of drinks at the pub making it a pretty good way to save money.
• At the same time, Reed Hastings, founder and CEO will be stepping aside to become executive chairman (read ambassador) with the COO and head of programming both taking over as joint CEOs.
• I suspect that this is going to cause problems as joint CEOs often disagree which can leave a company stranded strategically as big decisions get delayed or a messy compromise is reached.
• I have never seen this structure work well and I think that Netflix has probably got some tough decisions to make as it seeks to reignite growth and increase margins.
• I view this as a negative outcome as I think the quality of management execution will now fall from where it was before.
• Despite the jump, growth in revenues remains pretty slow and will remain so in 2023 with 3.9% YoY forecast for Q1 2023 with similar likely for the rest of the year.
• To combat this Netflix is digging deep to find extra revenue and has decided to target account sharing as a place to increase monetisation.
• Netflix estimates that around 100m households share logins with other households denying revenue to Netflix which is a problem the company has largely ignored as growth was excellent without having to fix this problem.
• Times are now much harder and so later in Q1 2023, Netflix will begin rolling out a new plan called paid sharing which will aim to monetise those households that currently get Netflix but don’t pay for it.
• Historically, such a large best on subscribers would have resulted in a big jump in the share price but only 7% was managed in after-hours trading.
• This is despite the company trading at roughly half of its previous valuation and gives an idea of how cautious the market is around companies that demand a high valuation in return for growth.
• The problem is that Netflix’s valuation remains pretty high but the growth has evaporated leaving me completely uninterested in entertaining a position in this stock.

• Making electric cars is not nearly as exciting as vehicles that drive themselves, but the fact that they are here now as opposed to “sometime in the next 10 years” means that they will be headlining the show this year.
• This continues the theme of reality over narrative that has been forced upon the technology industry now that valuations have been crushed and capital is scarce.
• This is exemplified by the fact that a tractor maker (John Deere) is delivering one of the major keynotes this year.
• It is not lost on me that getting a tractor to drive itself up and down a field in a straight line with no other obstacles is not exactly difficult, but sentiment is now so poor that this is all the industry is confident of delivering on schedule.
• Another example is the LVCC Loop where Tesla vehicles ferry people around the LVCC in tiny tunnels at 30mph or less which I have argued would be much more effective if they were pedestrianised (see here).
• The original promise was that autonomous pods would be zipping through undercity tunnels at 200kph / 150mph but reality once again got in the way.
• The LVCC loop, like an empty field, should be one of the easiest environments to convert to autonomy but the drivers are still there as it appears the sensor suite can’t handle the proximity of the walls.
• CES headlining with John Deere, BMW and Stellantis would have been unthinkable just 2 years ago and is a sign of how much things have changed from last year.
• Hence what we are going to see is a series of electric vehicle launches and a lot of discussion about how the software-defined vehicle will be delivered.
• This is far more difficult than it sounds but centralising software in the vehicle is required to deliver the ability to updates and services to the vehicle without an expensive visit to the dealership.
• This will predominantly feature in electric vehicles rather than petrol vehicles given that it requires the vehicle platform to be recreated almost from scratch.
• This is happening anyway in electric vehicles meaning that digitising EV is far simpler than trying to retrofit digital onto a legacy platform.
• This is why digitisation and electrification go hand in hand and I suspect that together these two will be the main themes of the show this year.

The Twitter effect.

• Also making the rounds in the pre-show chatter is the example of Twitter and what this means for the ability of social media and the app economy to function with far fewer employees.
• Twitter’s headcount is down by 70% but the service is still functioning and hardly anyone has noticed a difference in the service.
• Twitter proponents will point to the recent outage and the fact that R&D cuts take some time to manifest themselves in weaker products as evidence that the cuts have hurt the functioning of the company.
• However, I think that everyone suffers outages from time to time and it has been a long time since I have seen any new R&D-driven features appear in Twitter.
• At the same time engagement with the service has increased significantly, meaning that with a 70% headcount reduction, Twitter may now be cash positive.
• This raises the question as to whether the other social media companies like Meta, Snap and so on are also substantially overstaffed and whether their financial woes could be fixed with large headcount cuts.
• Meta has spent the last few years recruiting content moderators like crazy because its AI has not been good enough to do the work of humans.
• Although revenues are struggling, engagement with Meta’s services continues to be strong and so I suspect that if it was to really take the knife to the fat, a lot of cash could be generated without harming the underlying business materially.
• This would be a much better way to raise money to invest in the Metaverse because, at the moment, it is shareholders who are footing the bill as EPS is likely to decline again this year.
• Using Meta’s own forecasts for 2023, I can derive EPS of $5.58 which is far below Wall Street consensus and would indicate a 2023 PER of 22.8x which is very expensive for a company where earnings are in decline.
• Meta’s shares seem to be pricing in cuts to OPEX that Mr Zuckerberg has said he doesn’t want to make.
• Hence, I don’t think the shares are cheap and I still don’t want to think about bottom-fishing this unless it hits around $70 per share.
• There are far more interesting things to look at in a stock pickers market that is likely to persist for 2023.

• The general malaise in advertising is by no means limited to the big names as even TikTok which has gained a lot of market share in the last few years is feeling the pinch and has been cutting its estimates for 2022.
• TikTok’s original forecast made earlier this year was for revenues of $13.3bn but this has now been pared back to $10bn for 2022.
• This still represents significant growth from taking market share, but the drag effect of the underlying slowdown has clearly taken its toll.
• Those most impacted by the predations of TikTok (Meta Platforms and Snap) are the ones that have reported the worst deterioration in their performance in Q3 2022.
• This makes sense as these companies will have suffered as the market weakened and again as they ceded share to TikTok.
• In fact, e-marketer estimates that the US market for social media advertising (by far the biggest) will now grow by just 3.6% in 2022 down from more than 30% last year.
• Given how Alphabet and Amazon fared in digital advertising during Q3 2022, this estimate looks to me to be about right.
• Hence, Meta Platforms’ no. 1 priority right now has to be to cease ceding share to TikTok without which it probably would have reported revenue growth of around 4% rather than a decline of 4%.
• This is not going to be easy because even as user engagement is still strong at Meta Platforms, TikTok is better at understanding the nature of videos and recommending them to users that will enjoy seeing them.
• TikTok is able to do this because its parent company, ByteDance, is an AI company that has created what I think is the best video-related AI recommendation engine in the world today.
• This is why RFM ranks ByteDance as the No. 4 AI firm globally which together with Baidu and SenseTime underlines how good China is at AI.
• However, this has not been enough to prevent the company from feeling the sudden slowdown and the cut in expectations for 2022 is the result.
• Furthermore, TikTok has been losing staff due to demands to return to the office and the company’s decision to buy back shares from employees in lieu of the promised IPO that did not materialise.
• I suspect that TikTok’s woes on the staffing front are now over given how much supply is coming back onto the market, and if it wants employees in the office 5 days a week, then this will be quickly achieved without much fuss.
• This is why I think that this downturn sounds like the end of the work-from-home trend given that the labour market is now (or will soon be) a buyers’ market.
• Despite this, I think that the outlook for TikTok remains good in that it is likely to continue taking market share which will allow it to grow faster than the market.
• This downturn is also likely to instil more discipline into TikTok which by many accounts has been spending heavily and will now be forced to cut back.
• TikTok is unique in that it is one of the only Chinese Internet companies to get any real traction overseas which will also make it a target for US regulators and legislators looking for ways to contain the rise of China on the world stage.
• Barring any regulatory or US state interference, I think TikTok is in a good position to continue to take share from Meta Platforms and Snap in 2023 putting both of these companies in a difficult situation.
• I continue to think that Meta Platforms will become interesting at $70 per share as Mr Zuckerberg’s insistence on not slowing investments will hammer profitability again next year.

• If Mr Zuckerberg really intends to cater to the interests of minority investors he should immediately realign his voting interest in the company with his economic interest as the cuts announced this week are not much more than a token gesture.
• Meta Platforms has announced that it will cut 11,000 employees in a move that should reduce OPEX by around $1.2bn which for all intents and purposes is a rounding error in terms of total OPEX.
• Hence, I see this as a token gesture to keep investors quiet in another sign that when it comes to pecking order, Meta ranks investors dead last.
• This is not the first time that Meta has shown its disdain for its minority shareholders as in 2017 the company proposed to issue a new class of shares that would further tilt the voting balance in favour of Mr Zuckerberg.
• In this instance, Mr Zuckerberg wanted to sell some of his stake in Meta Platforms but not give up any of his control of the company (see here).
• After the threat of a class action lawsuit, this plan was withdrawn but it serves as an example that Meta Platforms views minority investors as a nuisance and ranks them well below the officers of the company as well its employees and customers.
• To be fair to the company, these practices are no secret and no one has been forced to buy the shares meaning that investors who are whining about these issues do not have a leg to stand on.
• The problem with these reductions is that they should have gone hand in hand with a change in guidance for 2023.
• As it stands today, OPEX in 2022 will be around $86bn and the company has guided that this will rise by 14.5% to $98.5bn (midpoint).
• If I factor in these reductions (assuming they are complete by Jan 1^st 2023), then 2023 OPEX should be reduced from $98.5bn to $97.3bn or a rather puny 1.2%.
• This means if revenues are flat at $116bn (they might decline), EBIT will be $18.7bn which after-tax translates into $15bn of net income or $5.58 per share.
• This puts the company on 20.0x 2023 PER which is very expensive for a company where earnings have fallen precipitously with no recovery in sight.
• Furthermore, governance remains poor with Mr Zuckerberg alone in the driving seat meaning that a heavy discount is warranted to fair value when looking for an entry point into this stock.
• The shares have recovered sharply with the lower-than-expected US CPI release but the largest reversals or bounces are always seen in a bear market.
• Hence, I don’t think the worst is over for this company and with its short to medium-term outlook, $70 per share is where I would begin to get interested.
• There are far better options to look at where there is growth to be had at a much lower multiple.

• The activists are starting to come out of the woodwork voicing their dissatisfaction with Meta, but the reality is that unless they convince Mr Zuckerberg, the only vote they have is with their feet.
• Altimeter Capital, which owns $325m in Meta has written an open letter (see here) to Meta bemoaning the awful share price performance and its level of expenditure both on the Metaverse as well as more generally across the company.
• Altimeter is of the opinion that Meta has become bloated over the course of its very rapid growth and now needs to reduce headcount expense by 20%, reduce capex by $5bn and limit investment in the Metaverse to $5bn per year.
• All things being equal this would return Meta in line with its peers in terms of free cash flow generation and help reverse the large PER discount that has opened between Meta and the other digital ecosystems (ex-China).
• Altimeter is careful to be non-confrontational and as such it is not making demands which I suspect is driven by the knowledge that the only person who has any say in how Meta is run is Mr Zuckerberg himself.
• This again lays bare the shortcomings in the corporate governance of many technology companies around the world where founders still control the company despite having sold the vast majority of the economic interest.
• This is achieved through a separate distribution of shares which carry 10x or more as many votes than the shares in wide distribution which is a practice that I have long argued has no place in large public companies.
• In small private companies, this is not a problem as they often need to be able to pivot very quickly to adjust to changes in their operating environments.
• In large public companies, it means that founders often hold onto losing strategies due to emotional attachment without having to pay the economic price.
• While the share price continues to rise, nobody except outliers (like RFM) care, but it is when things go wrong that this issue comes back into the spotlight.
• This is exactly what is starting to happen now, and I doubt that Altimeter will be the last shareholder to voice its dissatisfaction.
• Meta Platforms is an extreme example of this because if Mr Zuckerberg is determined to run Meta into the ground to pay for investments in the Metaverse, there is no one that can stop him.
• This is the danger of investing in all public companies where there is a mismatch between control and economic interest, and I have historically dealt with this by adding a discount to fair value in order to account for the added risk of founders acting against the interest of other shareholders.
• At 12x 2022 PER, this discount is now at 50% which makes Meta an interesting proposition to consider.
• However, I am not yet convinced that the worst of Meta’s issues are behind it in terms of digital advertising and the impact of the retirement of its cash register (Sheryl Sandberg) has yet to be felt.
• Hence, while Meta is clearly in value territory, the time is still not right to take a position in it.
• I remain happy to sit on the sidelines and wait a bit longer.

• Much has been made of Mr Musk’s plans to create a super app called ‘X’ with Twitter as its starting point, but the reality of numbers demonstrates that this is probably the only way that any money will be made from acquiring Twitter for $44bn.
• Twitter is what RFM refers to as a microblogging platform and in this niche, it is untroubled by serious competition and the company is pretty good at monetising the traffic it has.
• The problem is that within the spectrum of activities that users engage with on a daily basis, microblogging takes up only a small fraction of the total time spent with a smartphone.
• This means that the total monetisation opportunity is a small portion of the total possible which is why companies like Meta and Google can generate far more revenues from users than Twitter can in its present state.
• Furthermore, Twitter’s user base is much smaller and is unlikely with its current service to ever get to the size of the larger digital ecosystems which further limits its ability to generate revenue.
• This is not a new state of affairs and has been the main reason why the shares have pretty much gone sideways since it went public in 2013.
• At a price of $44bn, Mr Musk is paying roughly 10x EV/revenues for a company that is not far off being ex-growth, makes a small profit and generates very little cash.
• Consequently, it is not hard to argue that he has massively overpaid for the company which I would value in this climate at somewhere around $17 per share.
• Mr Musk doesn’t seem to care much about this as his main motivation for buying Twitter in the first place appeared to be ideological rather than commercial (see here)
• However, his backers and his creditors will be looking to earn a return from this transaction and so Mr Musk needs to achieve that which Twitter’s management has failed to deliver ever since it went public.
• The way to deliver this return is simple in concept but fiendishly difficult in practice which is to broaden Twitter’s appeal beyond just microblogging.
• If Twitter can offer more than microblogging with for example a chat service like WhatsApp or a social network service like Instagram or TikTok or a payment system like WeChat Pay, then users will spend more time within Twitter’s services and more users are likely to sign up.
• This would also mean that Twitter would have a better understanding of what it is that its users do as well as more opportunities to send them advertisements.
• This is how revenues could get much larger and this is exactly what Mr Musk is hoping to achieve with super app ‘X’ which seems to be inspired by WeChat, the app where Chinese users go to do pretty much anything.
• Twitter has tried this before with forays into different types of video, but all of them have come to nothing, leaving Twitter now exactly where it was 10 years ago in terms of service.
• Consequently, Mr Musk needs to succeed where all of his predecessors have failed which, given that this appears not to be his main motivation for buying the company, looks like a tall order.
• Hence, I expect that not an awful lot is going to change at Twitter although we will probably see one or two half-hearted attempts.
• Consequently, the real winners from this transaction are the current shareholders who now look much more likely to get their $54.20 than I ever thought possible.
• The shares currently offer the potential of 10% further upside if the deal goes through and 65% downside if it fails, meaning that holding out for the last 10% makes very little investing sense.
• I would have sold out ages ago if I had had the shares (which I did not).