The flawed math behind Elon Musk's Twitter deal.

May 2, 2022 at 9:04 a.m. EDT

By Steven Pearlstein

Truth about lies

According to a recent study by David Kirsch and Mohsen Chowdhury of the Smith School of Business at the University of Maryland, the 84 million users following Musk on Twitter didn't just show up on their own. Many were cultivated by bots - fake accounts programmed to respond to tweets by or about Musk or Tesla with tweets crafted to boost the company's reputation, driving the momentum investing that's inflated the tech bubble. The robots, they wrote, were also programmed to troll critics of the company with nasty or threatening messages.

Using a software program called Botometer, Kirsch and Chowdhury found that of 1.4 million tweets from the top 400 accounts posting to the "cashtag" $TSLA, 1 in 10 were from bots.

While it's unclear who is behind the bot effort, and the two researchers are still working on directly linking tweets to movements in Tesla stock, the data "raises questions," they write, about whether the activity was part of an organized effort to boost Tesla's price.

Musk, of course, is no stranger to charges of market manipulation, having agreed to pay a $20 million fine to the Securities and Exchange Commission for doing just that, in connection with 2018 tweets in which he suggested he was prepared to take Tesla private. This year, Musk tried to nullify that settlement, which requires that his tweets be reviewed by a Tesla attorney. Just last week, a federal judge in New York denied that request. But Musk shows no sign of letting up in his battle with the SEC, which he regularly accuses of unconstitutionally muzzling his speech. That challenge to the SEC will continue to cast a legal shadow over the company and its stock price. If Musk's overvalued and rapidly declining currency - his Tesla stock - is one glaring problem with the Twitter deal, another is that he's using it to overpay for a company that has lost money for the past two years as user growth has slowed. With no net earnings, it's not possible to calculate its price-to-earnings ratio. But an alternative value measure - the ratio of stock price to sales - now stands at 8, which looks rather rich for a money-losing operation. (Highly profitable tech companies are selling at 4 to 6 times sales.)

Musk now boasts of plans to grow and monetize Twitter back to profitability, but that is hardly a sure thing. The social media platform is already shut out of the all-important Chinese market because of censorship, while many younger people are migrating to TikTok and Snapchat. And just last week, the European Union announced a bold set of regulations that will require platforms to take more aggressive steps to control disinformation, limit hate speech and disclose how their algorithms amplify divisive content. U.S. regulators are considering similar requirements.

There's also the little matter of where Musk will find the money to service all those loans he's taken out to buy Twitter. In the typical leveraged buyout, the purchaser looks to the company he's buying to generate the cash to cover the interest payments on the buyout loans. Musk is now on the hook for about $1.25 billion in interest payments, assuming a 5 percent interest rate on those $25 billion in bank loans to buy Twitter. But the most free cash flow that Twitter has ever generated was $868 million back in 2018, and it's been all downhill since then. Last year, in fact, Twitter's free cash flow was a negative $370 million.

For all these reasons - the financing challenges, the bursting of the tech bubble, the economic and regulatory head winds facing both Tesla and Twitter - there's an even chance Musk will walk away from this deal and pay the billion-dollar "breakup" fee required under the purchase agreement. Whether the deal goes through or not, however, it will have helped expose how thoroughly out of whack tech stocks - and stocks in general - have become in relation to the price of everything else.

The market's wild swings in recent months are all the proof you need that the Great Repricing has begun. The giant economic and financial bubble created by a decade of aggressive government borrowing, money printing and persistently high trade deficits produced an economic mirage in which workers' wages, interest rates and the price of goods were too low, while prices of stocks and real estate and credit instruments became too high. Now that fantasy of high growth and low inflation will need to give way to a painful period of low growth and high inflation as stock prices are brought in line with profits, credit in line with the prospects of repayment and house prices in line with the incomes of the people who live in them.

The question is not why this re-pricing is happening now, but why it didn't happen years ago. And the way to think about what lies ahead is not that we will be less wealthy but, like Elon Musk, we were never really as wealthy as we thought we were.

Steven Pearlstein was a Post business and economics editor, writer and columnist for more than 30 years, winning the Pulitzer Prize for columns anticipating the 2008 financial crisis and recession. He is now the Robinson Professor of Public Affairs at George Mason University.

Next: Unlike the genius of Nikola Tesla, Elon Musk sounds like a used car salesman who sells junk.








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