Musk Bought, but Twitter (NYSE:TWTR) is Still Difficult to Value on an Intrinsic Basis

As Twitter's (NYSE:TWTR) stock price changes caused by Musk's new US$2.9b position, we wanted to revisit its valuation and see what the company is worth on an intrinsic basis. This can give investors a good anchor that may keep them from taking on too much risk.

Quick recap - disclosure documents reveal that Elon Musk has taken a 9.2% position in Twitter, making him the largest shareholder.

Previously, Musk tweeted the following Yes/No poll:

Free speech is essential to a functioning democracy.

Do you believe Twitter rigorously adheres to this principle?

— Elon Musk (@elonmusk) March 25, 2022

Slightly indicating that he will use the poll results to take future action. However, the disclosure reveals that he already bought the shares on the 14th March.

People who are following Twitter are already debating the implied changes with regard to a possible comeback of some banned accounts, changes to the TOS, or if this is just a distraction from issues that might come up in the future in Tesla (NASDAQ:TSLA).

For our analysis, we will focus on estimating the intrinsic value of Twitter, as of today. You can view a summary of our key findings below:

• After the disclosure, Twitter has jumped some 29% intraday
• The total value of Twitter's future cash flows can be up to US$66b
• The market also seems to be pricing-in the value of possible changes and Musk's brand
• Twitter isn't the most reliable company as it has a history of underperformance

Valuation

Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value via a DCF. The result of this analysis should yield an approximation of the total value of the company, based on their ability to produce cash flows.

Cash is king, and for the people that don't think that this time it's different, a DCF is the gold standard.

Remember, though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Twitter

We're using the 2-stage growth model, which splits the calculation into a forecast and a terminal period. Where possible we use analyst estimates, but when these aren't available we extrapolate from the last estimate.

10-year free cash flow (FCF) estimate

	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031
Levered FCF	US$479.1m	US$836.3m	US$1.32b	US$1.77b	US$2.52b	US$3.10b	US$3.62b	US$4.06b	US$4.44b	US$4.75b
Growth Rate Estimate Source	Analyst x6	Analyst x6	Analyst x3	Analyst x1	Analyst x1	Est @ 23.14%	Est @ 16.77%	Est @ 12.32%	Est @ 9.2%	Est @ 7.01%
Present Value, Discounted @ 6.9%	US$448	US$731	US$1.1b	US$1.4b	US$1.8b	US$2.1b	US$2.3b	US$2.4b	US$2.4b	US$2.4b

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$17b

We now need to calculate the Terminal Value or the value of cash flows after the forecast period. For our analysis, we discount the value at a cost of equity of 6.9%.

Terminal Value (TV)= FCF₂₀₃₁ × (1 + g) ÷ (r – g) = US$4.7b× (1 + 1.9%) ÷ (6.9%– 1.9%) = US$97b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$97b ÷ (1 + 6.9%)¹⁰= US$49b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$66b.

Currently, the stock seems to have stabilized at US$40.6b, which would imply a further 40% upside.

There are 2 key assumptions in this analysis! One, that analysts are right on the future cash flows - something that might be questionable given Twitter's past performance. Two, that our later extrapolation isn't too generous - while we use a formula that converges to stable growth, sometimes these estimates can be a bit optimistic.

On the other hand, if you think that Twitter cannot make more than US$1.8b in FCF, then the company value comes out to:

(448+731+1100+1400+1800)+((1843/0.045)/(1.069)^5)=5479+29341=34,820k or US$35b which would imply that the market is pricing-in the expected growth before the disclosure, plus a value of Musk's brand and/or implied changes in the company.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. For Twitter, we've compiled three important elements you should look at:

1. Risks: As an example, we've found 1 warning sign for Twitter that you need to consider before investing here.
2. Future Earnings: How does TWTR's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.