Back in September, Fidelity Investments, who has a stake in X (formerly Twitter), formally adjusted the value of their holdings down so that the company Musk bought for $44 billion was now worth $9.4 billion in their view. Earlier this month, X raised a new round of secondary investment, valuing the company again at $44 billion. This has led to sterling, but telling headlines for Elon’s propaganda site, like this one from The Guardian: Value of Elon Musk’s X ‘rebounds to $44bn purchase price.’
If X really did rebound beyond a shadow of a doubt to its $44 billion purchase price, you wouldn’t need to quote someone to make that declaration. The Financial Times’ headline on this report is also notably cagey, asserting that “Elon Musk’s X obtains $44 billion valuation in sharp turnaround.” The word “obtains” is a key qualifier here, and digging into the nature of the deal reveals why the FT leaned on that hedge. They did obtain a $44 billion valuation, but that does not mean it is accurate.
A secondary round of investment is different from the typical acquisition you see in the news like Musk’s initial purchase of Twitter, where a new company or group of investors buy a stake in a business. The main difference between the two kinds of deals is that in a secondary offering, no new shares are created, it is just a transfer of existing ownership between investors through a secondary market that does not include the company, just investors.
This makes it very different from a typical open market acquisition where new shares are created, and you can write more certain headlines assuming that the price the new investors paid generally reflects the company’s current value (assuming those investors weren’t sued into buying the company at a wildly inflated figure they stupidly committed themselves to for the lulz). Because the people who now get to value Twitter at a very convenient $44 billion are the same people who bought it at the wildly inflated $44 billion in 2022, it makes their financial motivation through this saga much less straightforward, especially since FT is reporting that Musk is also trying to raise a new $2 billion round of funding to pay off the final $1 billion in debt he took on when he bought it in 2022. These friendly headlines Twitter is getting are certainly helpful to that cause.
Andreessen Horowitz, Sequoia Capital, 8VC, Goanna Capital and Fidelity Investments were part of Elon’s Twitter purchase in 2022 and are still reportedly holding their shares after this new secondary round. Whether these investors increased their ownership and participated in this round is difficult to find information on just a day after the announced deal, but thanks to disclosures from another Twitter investor since 2011, the Kingdom of Saudi Arabia, we know one current Twitter investor has been willing to buy more shares at around a $44 billion valuation. Elon Musk bought $150 million worth of Twitter shares last year at a value approaching the initial purchase price, and per Saudi Arabia, “expressed willingness” to buy more at that same value. It’s not unfair to wonder whether he was in this deal too and if he brought any other existing coneheaded investors along with him to buy more squeamish investors out of Twitter.
If Fidelity valued the company at $9.4 billion in September, but it’s supposedly worth $44 billion just six months later, then one of two things must have happened to make this new deal an investment that accurately reflects Twitter’s current value. Either Fidelity’s $9.4 billion valuation in September was off to such a degree that everyone there should be excommunicated from finance forever and banned from even looking at a Bloomberg terminal, or Twitter’s profits soared by several orders of magnitude over the last six months. This is all made more difficult by the fact that Twitter is a private company now, and so unlike prior to 2022, we cannot look at public financial statements to discern the truth, and we must rely on reports from insiders.
The FT reported that “X’s revenues have dropped since Musk’s takeover, but it posted about $1.2bn in adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) in 2024, according to two people familiar with the matter — roughly flat with the period before Musk’s takeover,” but also that a “a further person noted, however, that the EBITDA figure was ‘wildly adjusted.’”
EBITDA is a major financial metric to gauge a company’s profitability before the litany of accounting quirks and tricks come into play, but there’s a reason why legendary investor Warren Buffett called it a “very misleading statistic and it can be used in pernicious ways.”
The central problem with EBITDA is that unlike say, Generally Accepted Accounting Principles (GAAP), there is no widely used standard for it that every company adheres to. The finance world can’t even agree on how to pronounce the damn acronym. You simply cannot compare the EBITDA of company X to company Y like you can with disclosures governed by GAAP because both firms likely use different methods to calculate the stew of variables that go into EBITDA. Plus, while the figure tries to remove aspects that do not seem central to a company’s core profitability, like interest expense, that money to pay a required annual expense still comes out of the business’ bank account. Because of these blind spots, EBITDA often differs from a more straightforward metric like a company’s free cash flow that gives you a much better idea of how much cash it is actually generating.
EBITDA doesn’t actually reflect a business’s true profitability so much as it is an idealized vision of it in a world that will never exist, and this is reportedly a central part of Twitter’s new $44 billion valuation.
The public market is a helpful gauge for company valuations, and while it is not perfect and still subject to the same corrupting EBITDA forces that drive secondary sales like this, it is the best system mankind has built so far to gauge fair value. And recently, a different, more intelligent part of the market spoke pretty loudly about Twitter’s valuation. A consortium of banks led by Morgan Stanley sold their loans they issued to Musk in 2022, and shed nearly all the $13 billion debt they have had dragging down their books for the last two years. The banks initially targeted a sale of Twitter debt at 90 to 95 cents on the dollar, but sold $5.5 billion in February at a discount of 97 cents on the dollar, and the next tranche reportedly was sold a little higher than that discount. This is what constitutes good financial news at Elon’s Twitter these days, yet somehow, it’s currently worth more than it was valued at when he bought it.
Despite the inherent opacity of the bond markets, assessing the dynamics around Twitter’s debt is much simpler than parsing the details of a secondary market sale from existing Twitter investors to those who have expressed willingness to buy Twitter at its initial inflated $44 billion valuation. If you are a major bank holding on to a company’s debt and you think that they are extremely likely to pay down that debt, you will not sell it because you will make money on it due to interest. You certainly won’t sell the debt at a loss if you have a positive company outlook. If you think they are at all likely to default, this is where risk managers come into play to determine how much to sell to reduce their risk exposure.
Morgan Stanley’s risk managers decided that all of it had to go. I will trust their assessment of a company Musk even said this year was “barely breaking even” than a transfer of shares from investors literally fleeing Twitter to what I would bet is the greater Silicon Valley Thiel-verse orbiting Andreessen Horowitz and others looking to get in good with America’s new despot.
No one truly knows what Twitter is worth except for Twitter’s accountants and everyone who has been made privy to its full slate of financials. That surely includes these investors in this deal, but the fact that Fidelity admitted that they were way down on their initial investment in September provided the incentive to make this deal in March. If you’re down 80 percent, you’re not going to sell your stake at anything remotely approaching what you invested at, and the only way to recoup your money is for the investment to regain its value. There’s a lot of ways to regain company value, such as legitimate ones like increasing revenue or illegitimate ones far more preferred by much of the market like messing around with EBITDA. I don’t know what Twitter should be valued at, but I’d be willing to bet all my in the money Tesla shorts that it’s less than $44 billion.
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