Fidelity slashing its X valuation shows that Elon Musk is a bad trader
Fidelity keeps writing down its X stake, but Musk's biggest problem isn't his business skills: it was his purchase price.
The Washington Post reported earlier this week that Fidelity’s stake in Elon Musk’s social media site “X” is down more than 72% in value since Musk acquired the company, dropping from $316 million to $88 million in less than two years, and the company’s top eight investors (outside of Musk) are a combined $5 billion underwater on their positions.
A 72% drop in less than two years is, obviously, not great! For comparison, here is how a few other social media stocks have performed since Musk’s Twitter acquisition closed on October 28, 2022:
One oft-cited reason for X’s valuation collapse has been its advertising revenue woes. Musk hasn’t exactly encouraged large advertisers to stay on the platform, telling advertisers who threatened to “blackmail” him to “go fuck yourself,” and more than 100 brands took his advice, pulling their advertisements from X. In October 2023, Reuters noted that X’s monthly US ad revenue had declined by at least 55% year-over-year each month since November 2022, including a 78% drawdown in December 2022. Bloomberg also reported that the company’s ad revenue (which is 70-75% of total revenue) in 2023 was estimated to be ~$2.5 billion, with total revenue reaching ~$3.4 billion, compared to $5 billion in total revenue in 2021. Obviously, a 32% revenue decline won’t be good for business.
However, another, less-discussed factor in X’s valuation collapse was the circumstances of Elon’s purchase price. If you recall, Musk tried to renege on his $44 billion Twitter purchase in 2022, claiming that Twitter was lying about the number of bots and fake accounts on the platform. Obviously, his appeal didn’t work, and he eventually had to buy it. While Musk may or may not have had legitimate concerns about Twitter’s bot problem (which still hasn’t been fixed, for those curious), he likely had another concern: the price tag. Musk paid a really high price for Twitter as the tech sector (and, more specifically, social media), was in a steep bear market. Before Musk made his offer, he had purchased shares of Twitter in the open market between January and April 2022 between $30 and $40 per share. On April 14, 2022, he offered to buy the whole company for $54.20, or $43 billion.
But between April and when the deal actually closed in October, tech stocks tanked. Meta’s stock fell by 53% and Snap, arguably Twitter’s best comparison given the size of its user base and similar ad revenues, collapsed by 70%. But Musk’s bid, which was already a 38% premium to where the stock was trading before Musk disclosed his open market purchases, was binding, so he was forced to pay top dollar for the social media site as the valuations of its competitors crashed.
While most of the X valuation discourse has focused on Elon’s (and current CEO’s Linda Yaccarino’s) mismanagement of the business, the truth is that Musk also just paid way too much for the company, and valuation revisions reflect more accurate price discovery. Think about it: while Fidelity has written down its X investment by 72% since Musk acquired the company, Snap’s stock price fell by 70% between Musk’s offer date and acquisition date.
X/Twitter has actually outperformed Snap since Musk first purchased Twitter shares on the open market in January 2022. Assuming that X is now worth $15 per share, it’s down roughly 62% from January 2022, while Snap is down 78% in that period.
Yes, Musk has obviously had business missteps, but his biggest issue was making a binding offer at too high of a price for a mid-sized social media company. Had he made his offer six months later, after tech and social media companies sold off, he probably could have purchased the company for a fraction of the price.
