Twitter: There's been 'massive damage inflicted on the company' by Musk, analyst says

Jefferies Senior Equity Research Analyst Brent Thill joins Yahoo Finance Live to discuss the latest developments in the Elon Musk-Twitter lawsuit and the fallout of Musk's actions on the social media company.

Video Transcript

SEANA SMITH: Twitter shares are still-- you can see it, though, still halted, right around-- up 12%, 47.95 right now, after Elon Musk changes course and agrees to move forward with his $44 billion deal to buy the platform. A Twitter spokesperson now saying that, quote, "The intention of the company is to close the transaction at $54.20 per share."

We want to bring in Brent Thill, Jefferies equity research analyst, joining us now with more. Brent, you had a hold rating on the stock, $40 price target. Elon Musk doing a complete about face, saying that he now wants to purchase it for the original price agreed upon. What do you think? Is this good news for shareholders, bad news for shareholders? Where do you stand?

BRENT THILL: I mean, it's good news if you're long stock. I mean, there's no question about that. But I mean, look, it's been massive drama. No one really knew how it was going to end ultimately. I think the most pressing takeaway for us was at his Ted Talk. He said, this is not economically motivated. And that was the cue that it really didn't matter at what price because he wanted democracy for all, and that he wanted this in the hands of everyone as a conversation piece.

So, at the end of the day, I think the only thing you could really trust about anything he said during this whole thing, which has been all over the map, is-- at the core was, it wasn't about money, and it was about democracy. And that, again, he's following through. And ultimately, I think the court case, there's no reason why he wanted to go through this.

He knew that the odds were low and passed hearings that would be rejected. And he would be forced to go through it. So he probably is like, look, enough said. I'm going to own this thing at some point anyways. I've inflicted-- there's been massive damage inflicted on the company. There's been incredible departures. Advertisers have lost faith. You go through the list.

So this had to end. The drama had to end. And they had to move forward. And so hopefully, get it sealed, move on, reset and recast the strategy of the company, and try to salvage where he's at because right now, he's got a big, damaged-- he's got a damaged goods. And he's got to contend with it now.

RACHELLE AKUFFO: I mean, and considering all the drama that was swirling around, so you do have that price target at $40, where does Twitter go from here? When you look at the actual business aspect, what are you focusing on when you're sort of assessing the value right now?

BRENT THILL: Well, no one knew exactly what was going to happen. We were trying to assess the core value of business ex the transaction. So his dollar value was before the market meltdown, before tech massively hit the skids. And so he clearly tried to renegotiate the price as tech went through its slide. And now he's going to pay a premium. And that's what he said he was going to pay, so he has to pay it.

So we try to value the companies independent of whatever the companies are saying. And clearly, this a great win for shareholders that are long. And again, you've got to move forward. They've got to get this-- they've got to get-- they've got to get the deal formalized and move forward with the direction of where he wants to go. He has said there are radical changes ahead. So there's clearly going to be a lot more change. He was very clear about the board. He was clear about the management.

So, look, the entertainment factor of this is going to continue on. And I don't want to say that job losses and changes are entertaining. It's not. I don't want that to happen. But ultimately, this drama still is probably not over. And there's going to be many chapters to come that are written. This is probably in the early series of the book. So stay tuned.

And, you know, again, if people think Twitter is worth that much, I would say that Snap to me would be the most interesting one with more users and a more engaged user base, in many ways. So if I was looking for a derivative play, I think Snap is the derivative play with the stock here roughly below $11. That's the way I would play it. I'd be long Snap at this level.

DAVE BRIGGS: Interesting. What is the ad environment for Twitter? And do we presume Elon Musk still plans to take it private?

BRENT THILL: That environment is tough. I mean, it's really tough. So with the economic headwinds, you're seeing more pressure on advertisers. Advertising, it's the first thing you can turn off in an economic downturn. And so what we've seen from Snap, Twitter, Meta, Amazon across the board, ad growth rates have fallen out of the sky.

And part of that was over the summer. So some will say, well, that's summer blues. Everyone's traveling, and everyone's out and about. And you've had supply chain constraints. And supply chain constraints open as the environment absorbs these higher rates. We get closer to the holidays. The advertising environment should theoretically improve. We don't disagree with that. It should get a little bit better, hopefully.

But what we don't really know is the shape of the macro. Our economists at Jefferies are forecasting a recession into next year, and the GDP goes negative. In that environment, the first thing you turn off is advertising dollars. It happens in every downturn.

So the overall ad market right now is really unstable. It's kind of all over the map, if you will. It's almost like this case. It's all over the map. And remember, Twitter said flat growth at their earnings, and then they said up high single digits within a matter of weeks, just after their earnings.

So there's a ton of volatility. And a lot of this is tied to the macro, which is extremely volatile. The stock market's volatile. We're in a tough spot. I think long-term, we know where ad spend's going. It's going online. It's going to connect to TV. It's going back into these platforms over time. Just short-term, it's really hard to have a crystal ball exactly how this plays out through the next six months. So Twitter's got a tough challenge ahead of themselves, no question.

SEANA SMITH: Shares have resumed trading. Right now, Brent, as you've been speaking, the stock up now nearly 22%, closing in on that 54.20 value at 51.85. Brent, you mentioned the fact that it's anyone's guess right now just in terms of the priorities and where Elon Musk is going to go with the company. What makes the most sense to you in order to unlock some of that unreached potential and unreached value up until this point?

BRENT THILL: Yeah, I think the big thing for me is user interface. And I say this to anyone that owns a Tesla, you know what I'm talking about. I own a Tesla. My wife does. It's our favorite car in the family. And it's because of the user interface. It's a safe car. It has a clean UI. It drives itself. There are so many features about it. It's just, the user interface of that car is amazing.

Twitter is like the single worst experience online. It's awful. And so when you think about the usability, that's the first thing he's got to go after. Make the product more usable. So he has said that.

Number two, the cost structure, right? Elon's joked about the turning NASA headquarters into a homeless shelter in San Francisco. Like, it's a joke, but it's also the cost structure they need to rejigger, right? So that has to change on the cost structure. I think he's been very clear.

He doesn't like the advertising market. Is he going to make the subscription? What's he going to do? The model's driven off our advertisers. So now the fact that he has it, is it going to even force more advertisers away because he's been vocal that he doesn't love advertising? Like, what is the business model?

So I think the first thing right now is, if you want to democratize and make this available to everyone, you have to make the user interface and the ability for people to consume easier. It has to be elegant. It has to be prettier. It has to be all those things, and it's not today. It is the furthest thing from any other user experience I've witnessed. And I think they need to fix it. So that'd be the first thing I would go after.

And then what's the business case? Is it subscription? Is it advertising? Is it a combination? What is he going to do with the business model? We don't really know. He said, I don't like the advertising on it. He doesn't like bots. You go through the list. Like, there's a lot of things. So I'd say the first thing-- and I think he has an incredible opportunity-- is to really get the product nailed. That's going to be his first priority.

RACHELLE AKUFFO: And Brent, before we go, I want to make sure that we get your commentary on Amazon. We know that they're having this freeze on corporate hiring in their retail business for the rest of the year. And that Jassy is really looking at other ways to sort of control costs and efficiency in things like warehouses and logistics. I wanted to get your take on what we should read into the moves that Amazon is making right now.

BRENT THILL: The stock works in harvest mode and not invest mode. They are harvesting. They are cutting back. That is a great thing for shareholders. We put a note out this morning suggesting that sum of the parts, that the stock today equals the value of the digital businesses. And the retail business is basically a stub, and it's not embedded in the stock. There are various different ways you can look at it. That's the way we look at it.

So we think, ultimately, the value of the retail business is the giant overhang on the stock. If they improve their cost efficiency, they freeze the hiring, they get their-- right now, their distribution is ahead of where demand is at. And so they have to get that in sync, and that may take it into early '23. As they do that, investors are going to be more excited to come back to the core retail business, which they don't care about right now. They will care because they're going to get their act together.

And Jassy is a software guy. I'm a software guy. Software guys care about margin. They care about good profitable businesses. There's no way that he's sitting here going, yeah, I really care-- I really want to keep losing money on delivering toilet paper and deodorant to homes. That's not-- I don't think that's how they think long-term. And so I think, in our view, the margins are going to bounce back next year. Everyone on the planet is flocking to AWS. It is the de facto platform for cloud computing. They're way ahead of Microsoft and way ahead of Google.

Their ad business is on fire. They've got great reviews on Thursday Night Football. There's all these things that are working. They've got to get the retail business fixed. And they've got to get the cost structure fixed. They're very clear that they're halting investment. That halt in that investment is going to be a very good thing for investors in the next two years.

So it's not going to happen overnight. I'm not here to say like, they've got everything fixed in the retail business. But I think the fact that we're in a more normal environment, and we went from, OK, buying everything online, then we went to Target and Walmart, and then we weren't buying on online, we're going to go back to a hybrid environment. It's good for Amazon, getting the costs in line.

The digital business today is in the stock. You can own the stock today with the hope that they just-- they fix the retail business at some point. And I think they will. And these are good announcements by them to cut the freeze and to put the costs-- to lower the costs related to that business. The more they do that, the higher the stock is going to get.

DAVE BRIGGS: And we'll all be flocking to Amazon one week from today for their October Prime event. Jefferies' Brent Thill, great to have you. Excellent stuff, sir. Thanks.