Rarely do my predictions come true but this time I might be on the right track! On May 2nd I suggested Twitter was overstating its value because of its bot problem – an issue that Elon Musk says is a material breach of his purchase agreement with the social media company.
Musk did them a favor by releasing this in a Friday night post-market news dump. This is going to gut their stock price on Monday as it raises serious doubts about the actual number of real, non-bot active users are on the platform. This was an issue I also covered in the May 2 video, where Twitter was forced to disclose that they overcounted actual users by about 1 million due to a software issue.
They really have no way to measure bots on the platform. Why? Because Wall Street demanded user growth. There’s no way engineers would implement any impediment to that growth – it’s engrained in the code and the culture there.
Ultimately user growth is a poor measurement. Twitter’s value I think comes from the weighty influence of the “small” number of actual users it does have. As @davewiner pointed out a few months ago Twitter really is a big newsroom/cocktail party.
My new prediction is this deal is still going to close – but perhaps closer to $25-30 billion which is probably what the company is really worth.
Elon Musk today announced that the Twitter deal was “on hold” until he could verify the company’s claims that fake users account for only 5% of their overall user figures.
Any acquisition has a period of due diligence to ensure that the company being acquired is worth what the owners say it is – and in the case of Twitter the number of users is the foundation of Twitter’s value proposition.
As a mostly free service Twitter relies on advertising and advertisers want large audience numbers with some assurances that the audiences Twitter serves are actually real people.
Twitter has long struggled with calculating the exact number of unique users on their service. In fact they disclosed that they had been overstating user numbers from March 2019 through the end of 2021 according to their most recent quarterly results:
In March of 2019, we launched a feature that allowed people to link multiple separate accounts together in order to conveniently switch between accounts. An error was made at that time, such that actions taken via the primary account resulted in all linked accounts being counted as mDAU. This resulted in an overstatement of mDAU from Q1’19 through Q4’21.
This overstatement alone accounted for 1.9 million duplicated users. If Twitter is overstating users that they know are humans behind the keyboards how can anyone be confident in Twitter’s claims that fake users are only 5% of their user base? Given the company is incentivized to demonstrate user growth they likely did not invest the resources to detect fake accounts and remove them.
Musk is in the driver’s seat now. If he walks away from the deal the stock tanks as it will erode confidence in the validity of Twitter’s user numbers. Twitter’s Board of Directors will likely feel some pressure to reduce the $44 billion price tag to get the deal done.