Elon Musk, the richest man in the world and the founder of Tesla and SpaceX, paid $44 billion for Twitter last month. Most M&A and social media experts believe the decision will be among the worst disasters in American business history. His approach of sharp staff cuts, however, may work. It buys him months, perhaps years, to get revenue above expenses.
It is worth remembering that in Twitter’s last quarter as a public company, it had an adjusted EBITDA of $112 million. Revenue for the period was flat at $1.2 billion. His staff cuts could have dropped expenses by $400 million a quarter. That would move adjusted EBITDA closer to $500 million per quarter. This leaves a large buffer as its revenue shrinks because marketers have pulled advertising.
One of Musk’s arguments for his eventual success is that daily active users will surge much higher than their recent daily average of 238 million, which rose at a rate of 17% year over previous year in the last quarter. A larger audience means Musk can charge marketers (those who stay) a larger sum. Musk’s gamble is that the number of advertisers who leave is more modest than press reports guess (and what he hints). Alternatively, many could return if they see that Musk has come up with ways to keep hate speech and other highly objectionable content largely off the social network platform.
Musk’s bet on how to keep unacceptable content off Twitter is one of his greatest gambles. The staff that handles this has been decimated. That leaves algorithms to do the job with very modest human assistance. It will be months before there is definitive evidence, one way or the other.
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