Originally publishes on my LinkedIn page, November 8, 2022.
Over a month ago, I authored a LinkedIn post that legacy automakers might need to rethink their usage of Twitter given its acquisition by Elon Musk. I noted that automakers like General Motors spend billions of dollars advertising every year (with some of those ad dollars going to Twitter). Yet, Tesla allocates no money towards adverting at all. Much of Tesla promotion is executed by Elon Musk by reaching his 100 million followers on Twitter, the site he now owns. Musk has used Twitter much better than any automaker. I questioned in the post how Musk might revise Twitter’s business model or usage rules that favor Tesla in a way that hinders how legacy automakers might promote their company and brands using Twitter.
Shortly after my post, GM became the first advertiser to suspend ad spending on Twitter. Other advertisers soon followed, including the Volkswagen Group (the parent company of Audi, Porsche, VW and other auto brands). MediaRadar estimates that GM spent $1.7 million per month advertising on Twitter. With 90% of Twitter’s revenue coming from advertising, the loss of ad revenue from major advertisers like GM could be devastating for a company that reported a $344 million operating loss during the second quarter. There have been reports that Twitter ad revenue is declining significantly since Musk’s acquisition of the company. He even recently tweeted that “Twitter has had a massive drop in revenue, due to activist groups pressuring advertisers.” While Musk might believe its activist groups pressuring advertisers to leave Twitter, companies believe they have to protect their corporate and brand image. Today, this requires a “wait and see” strategy regarding ad expenditures with the site.
But what if legacy automakers in particular have another business motive for ceasing to advertise on Twitter? What if they realize that financial trouble at Twitter might drive financial challenges at Tesla as well. According to Reuters, Musk provided a total of $46.5 billion in debt and equity financing to acquire Twitter. The $13 billion in debt financing was provided by financial institutions like Morgan Stanley. The remaining $33.5 billion equity commitment came from the stake Musk already had in Twitter, cash provided by Musk (including cash from the sale of Tesla stock), and additional funds from other investors like Larry Ellison.
Musk’s $13 billion in debt financing might be what competitive automakers recognize as an opportunity to hurt Tesla, their primary competitor for the future of automotive. The New York Times reported that Twitter’s interest expense has now ballooned to $1 billion a year. Yet the company only generated $630 million in cash flow last year. Of course Musk is driving significant cost reductions at Twitter like the recently announced headcount reduction. These moves surely improve the company’s cash flow. But losing $1.7 million per month of ad revenue from just one automakers like GM makes any Twitter cost reductions much less impactful.
What happens if Twitter cannot satisfy some of the $1 billion interest expense from the debt financing part of Musk’s acquisition? Will Musk be asked to make-up the shortfall? If so, might this involve Musk selling even more Tesla stock? Will this put additional pressure on the price of Tesla shares, which hit a 52 week low today (Note: Barron’s reported this evening that Musk sold another $3.95 billion worth of Tesla stock this month according to SEC filings.).
Last year Tesla was valued over $1 trillion. This massive valuation gave Tesla many avenues to continue financing its growth. With Tesla’s stock down 45% this year, the company’s market capitalization has fallen to slightly above $600 million. While this valuation is still significantly greater than any other automaker, it puts more financial pressure on the one person who has become the most significant threat to legacy automakers, Elon Musk himself.
I predict more legacy automakers will halt or slow advertising on Twitter. There will be a growing realization they cannot justify ad expenditures on a site actively controlled by their most important competitor. Publicly, they will suspend Twitter advertising for “brand safety” concerns, which are valid reasons. They also will begin to understand that supporting Musk’s Twitter only helps Musk’s Tesla. Some automakers will eventually recognize that Musk needs them more than they need Twitter.
Disclaimer
TaaSMaster, LLC is not a registered investment advisor or broker/dealer. All investment opinions expressed by TaaSMaster, LLC are from personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors may occur.