Financial analysis: Why Musk's Twitter purchase is such a disaster

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Twitter still made a billion dollars in revenue in the fourth quarter of 2022, The Information reports, citing insiders. Considering the destructiveness with which Elon Musk is taking his social network to task, that is a considerable chunk of money. However, it is also a good third less revenue than in the fourth quarter of the prior year. Back then, Twitter set its revenue record of $1.57 billion in three months.

There is no talk of that now. According to the source, the current daily turnover is 40 percent below the previous year's result. More than 500 of the most important advertisers have stopped their ads on Twitter, at least for the time being, since Elon Musk took over Twitter. As for the major automakers, Musk had to anticipate this: The corporations have no desire to throw their own money at the largest shareholder of Tesla, the most valuable car company according to stock market valuation, as long as they can achieve comparable advertising effects at similar prices elsewhere.

As for the other pausing advertisers, their withdrawal is the result of Musk's decisions. He fired those responsible for security on the platform, abolished the advisory board and promised a new one, but then admitted that this promise was a lie.

Of course you may do that, as a private owner. But not if you want to boost advertising sales. Customers seek Disney-like feel-good environments; seeing their baby milk powder or holiday cruise advertised next to calls for violence or conspiracy narratives rarely makes them reach for their wallets.

New Loans Crush Twitter

If Twitter were just a playground for a few super-rich people like Elon Musk and co-investors like Larry Ellison and al-Walid ibn Talal Al Saud, it wouldn't matter financially. However, the gentlemen have only financed part of the huge takeover price of 44 billion U.S. dollars (plus a few billion in expenses) themselves. At least $13 billion came from loans - and these loans were not taken out by the new owners, but by Twitter, Inc. itself.

Sounds like the company is pulling itself out of the mire by its own shoelaces, but the setup is not at all unusual in the world of finance. Of course, this means that the company will have to service this mountain of debt going forward. In Twitter's case, that translates to interest of about $1.5 billion this year (or more if interest rates continue to rise, which is widely expected), according to the Financial Times. That is only interest and does not include repayment installments.

The problem: Twitter can't afford it. Twitter couldn't have afforded it even before the sales slump. "Yes," is heard over and over again, "But Twitter was already losing money before Musk. 221 million dollars in 2021!" So Twitter was doomed financially anyway, Musk fans in particular think. If their idol might not be able to save the bird after all, he would at most have accelerated its swan song, but at least he would have tried to save it.

The "Net Loss" Misunderstanding

It is fundamental misunderstandings of accounting principles that tempt such views. While it is technically correct that Twitter reported $221 million in net loss for 2021, that is only true on paper; in no way does it mean that Twitter spent $221 million more than it took in. The net loss is relatively unimportant for the company's continued existence in the medium term.

To be able to pay interest and other expenses, you need money. You have to be "liquid". Liquidity is measured in terms of cash flow. To put it simply, expenses are deducted from income. Income can come from actual operations, from "investments" (at Twitter and many other data companies, speculation with securities, but also proceeds from the sale of capital goods), and from loans or the sale of new shares. If we consider only the income from operations, we call it operating cash flow.