Twitter Q2 preview: Where next for TWTR as battle with Musk looms?

When will Twitter release Q2 earnings?

Twitter is scheduled to release second quarter earnings before US markets open on Friday July 22.

The company will not be holding its usual earnings conference call ‘due to the pending acquisition’ by Elon Musk.

It will be an important day for Twitter, which will have two big jobs as it tries to steady the ship as Elon Musk tries to walk away from his $44 billion takeover of the social media platform. The first will be reaffirming its belief that Musk will be forced to follow through with the takeover at the original $54.20 price tag and communicating its legal argument as it prepares for a showdown in court against the billionaire. The second will be demonstrating the platform is growing and engaging its user base, and that Twitter has solid prospects regardless of what happens with Musk.

Twitter takeover: What next?

Musk launched a $44 billion takeover for Twitter in April worth $54.20 per share, but put it on hold in May before announcing he was walking away from the deal after alleging Twitter broke the terms of their agreement.

Musk believes he has the right to walk away penalty free, while Twitter is arguing Musk’s claims are without merit and that he must complete the takeover at the original price tag. That has set the stage for a legal showdown in court. Let’s take a look at when the battle will happen, what each side’s arguments will be, and what the end result could be.

When will the Twitter trial happen?

We found out this week that Twitter and Musk are set to battle it out in court in October. Twitter pushed for it to be expedited as it wants the matter resolved as soon as possible, while Musk’s team argued more time was needed so accurate information could be collected and asked for a trial in early 2023.

Kathaleen McCormick, the chancellor of the Court of Chancery in Delaware that is in charge of the case, said Twitter deserved a swift resolution and that the ‘delay threatens irreparable harm’ to the company.

Twitter and Musk must now work together to form a schedule, which should define the precise dates. We do know that McCormick has put aside five days for the trial. It is worth noting that Musk is due to appear before McCormick on October 24 over a separate matter relating to his record pay packet from Tesla.

Why does Musk want to walk away from Twitter?

Musk’s central argument for walking away from the deal is that Twitter has made ‘false and misleading’ representations about its user base and claims the company could be in severe trouble as a result. Musk believes the number of fake, spam and bot accounts on the platform could be ‘wildly higher’ than the 5% estimate provided by the company. Musk claims he has asked for the necessary information needed to clarify this important issue but Twitter has ‘failed or refused’ to supply it.

‘Sometimes Twitter has ignored Mr Musk’s requests, sometimes it has rejected them for reasons that appear to be unjustified, and sometimes it has claimed to comply while giving Mr Musk incomplete or unusable information,’ said Musk’s lawyers.

Musk therefore believes the user figures Twitter has been supplying are incorrect and misleading because a significant proportion are fake. Musk wanted more clarification about whether spam or fake accounts are included in Twitter’s daily active users but said Twitter has failed to provide the necessary information and data.

Although Musk says he has only had limited data, his team have conducted a ‘preliminary analysis’ that suggests Twitters user numbers are wrong. Musk argues Twitter is ‘dramatically understating the proportion of spam and false accounts represented on its mDAU count, and ‘wildly higher’ than the 5% claimed by the company. He also claims that Twitter’s claim to remove any accounts from its count once they are known to be spam or fake is ‘false’.

This, Musk’s team says, could cause Twitter to suffer a Company Material Adverse Effect – which is a change in circumstances that significantly reduces the value of the business. His legal team has also said Twitter has let go some key talent since the agreement was struck without consulting Musk first.

Why does Twitter believe the takeover must happen?

Twitter claims the reasons outlined by Musk’s team for abandoning the deal are ‘invalid and wrongful’, denying that it has breached any of its obligations under the agreement. The company argues it is in fact Musk that has ‘knowingly, intentionally, wilfully and materially’ broken the terms of the deal.

Twitter argued before Musk walked away that it was not possible for a third-party to independently verify the number of fake or spam accounts and supplied him with so-called ‘Fire Hose’ that sees all of the data flowing through the platform on a daily basis.

As far as Twitter is concerned, the deal is still on and only reliant on shareholder approval. It said it will ‘diligently take all measures required to close the transaction.’

Twitter vs Musk: Who will win?

The big question, and the one that will fuel speculation for weeks and months to come, is which side will win. We may in fact have no outright winner depending on how this plays out and could be left with a resolution that neither Twitter nor Musk want, but expect it to be a tumultuous ride that should keep the Twitter share price volatile.

Let’s have a look at the most likely outcomes at this stage:

Option One: Musk must complete the $44 billion takeover

The judge could rule that Musk must complete the takeover of Twitter for $54.20 per share as originally agreed. It may seem odd to some to force the world’s richest man to buy a company that he doesn’t want, but McCormick is one of the few judges that has forced takeovers to be completed in other disputes in the past.

For example, she told private equity firm Kohlberg & Co to complete its $550 million purchase of DecoPac Holding back in 2021 after the firm tried to walk away due to a lack of financing. That shows she is willing to make bidders stick to their commitments.

We could see appeals should Musk be told he has to buy Twitter and it is unclear when it would be completed. Notably, Musk’s financing arrangement must be sorted by early next year.

Option Two: Musk walks away

The judge could rule that Musk is correct and can walk away. In this scenario, the question becomes how much it will cost him. There is a break fee under the original deal that allows Musk to walk away for $1 billion, which Twitter investors will regard as the bare minimum it should receive in this legal fight. However, he could even avoid paying that if the judge thinks his argument is valid.

Option Three: Musk and Twitter settle out of court

Relations between Musk and Twitter have soured significantly but we could see the pair come to an agreement out of court in order to avoid a potentially damaging legal battle. Any agreement would likely allow Musk to walk away, potentially for a larger break fee. This would be the compromise option. Musk would be able to draw a line under the matter while Twitter would be able to show shareholders it won something for its troubles over recent months, although that could prove costly for Musk and disappoint those Twitter shareholders that were convinced they would receive a lot more.

Option Four: A takeover at a lower price

There is also a chance that the pair return to the negotiating table and strike a takeover at a lower price, although this looks highly unlikely. Musk could be enticed to buy the company if Twitter was open to a lower price that accounted for a higher number of fake and spam accounts. But Twitter can’t justify this without agreeing with Musk that the platform is riddled with bots and making a huge U-turn that shareholders are likely to find unacceptable.

Twitter Q2 earnings preview

Twitter’s second big job this week is to show the business is still in good shape by delivering growth in both engagement and user numbers while demonstrating its prospects are still solid as fears that an economic downturn could result in a pullback in advertising spending.

Markets believe Twitter will have ended the second quarter with 237.5 million average monetizable daily active users compared to 229.0 million at the end of the first. User numbers will be closely watched considering Musk’s main argument for trying to walk away from the takeover centres on accusations there are far more fake accounts on the platform than Twitter claims.

Wall Street forecasts revenue will rise 10.6% from last year in the second quarter to $1.3 billion but adjusted EPS is expected to plunge over 31% to $0.14.

Revenue is forecast to rise thanks to greater ad engagements twinned with a limited lift in prices, making the platform attractive to advertisers, but earnings will come under pressure as costs and investment levels rise at a faster pace. Analysts forecast total costs and expenses will come in around 16% higher from last year during the second quarter. Twitter has already slowed the pace of hiring and cut some waste in response, which investors hope can at least partly offset rising costs and slower topline growth. We could also see some contribution from Twitter’s new subscription service that is currently being pushed on its most active users, although it is extremely early days.

Twitter is highly unlikely to provide any forward guidance for the third quarter or the rest of the year this week because, as far as the company is concerned, it is still about to be purchased by Musk.

Still, investors will hope for some commentary on what to expect as they fret over a pullback in demand for advertising. Snap, the owner of Snapchat, has already warned that the privacy changes introduced by Apple last year – making it harder to target ads – and supply chain problems had prompted businesses to cutback on advertising. Twitter has proven more resilient to the IDFA changes introduced by Apple, but is not immune from the wider threats in the market.

Notably, Twitter had a goal of ending 2023 with 315 million users but withdrew this once the takeover offer was made, but this is still likely to be treated as a target considering the takeover is in doubt. Markets still have doubts over that amid slower growth, believing it can end 2022 with 253.7 million users and grow that to just 289.2 million by the end of 2023.

Where next for TWTR stock?

The offer price of $54.20 will remain the absolute ceiling for the share price so long as there is still potential for the takeover to go through. However, Twitter shares have largely been capped at under $40 – largely in-line with where it sat before the bid was launched - since the takeover was put into doubt when Musk pressed the pause button back in May.

With that in mind, there seems little upside opportunity for now unless you believe Musk will be forced to purchase the company for that price. The deal will hang over the stock until it is resolved and there seems little appetite for the price to move above the $40 mark in absence of a takeover which, with the stock trading at around the $39 mark, suggests there is more downside risk than upside potential for now.

That makes Twitter a risky play for investors at a time when the markets are already rife with risks. For traders, however, the legal battle could provide plenty of volatility to play with over the coming months.

The stock has sunk as low as $32.50 since the takeover was offered but we could see it slide as far as $32 if it does come under renewed pressure.

The share price will provide some insight as to what the markets think Twitter is worth without a deal on the table, and act as a gauge to how markets are feeling about the legal battle once it kicks off. The fact trading volumes over the last 10 days have risen some 55% compared to the 20-day average shows interest has exploded since Musk announced he was planning to walk away, although volumes remain well below the 100-day average as it remains too risky for some.

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