Twitter Stock Has Risks After Deal With Elon Musk

Stocks to sell

With Twitter (NYSE:TWTR) and TWTR stock facing multiple, tough threats and possessing no major positive catalysts, I recommend that investors sell the shares.

Overall, the biggest threat facing Twitter and its shares is the possibility that the takeover of the company — led by Tesla (NASDAQ:TSLA) CEO Elon Musk — will not close.

Such an outcome could occur if regulators, many of whom are probably not pleased with Musk, find a reason to decline to approve the transaction. Additionally, Musk could back out of the transaction because he does not have the stomach to deal with constant criticism of him and his free-speech principles. Or, he could bow out due to the possibility of the takeover materially harming Tesla.

Meanwhile, research firm Hindenburg, which is shorting TWTR stock, recently warned that Musk could decide to pay less for the company. This is because “multiple developments have weakened the company’s position [since Musk made his takeover offer], threatening the current deal dynamic.” Moreover, Hindenburg added that it believes “Musk could walk away from the deal for a $1 billion breakup fee,” giving Musk the ability to successfully lower his takeover price.

Squeezed From Both Sides

At the same time that Twitter is facing anger from the left side of the political spectrum, it is encountering tougher competition for right-wing consumers. That’s because Truth Social, the Twitter-like social media site launched by former President Donald Trump, is starting to ramp up.

The Truth Social app recently became the most downloaded app on Apple’s (NASDAQ:AAPL) App Store, and Trump is finally starting to post on the site. With that in mind, according to Forbes columnist John Brandon, the publicity around Musk’s agreement to buy Twitter is helping Truth Social. And the app could get a further boost at the end of this month when it becomes available on web browsers.

Reflecting on the recent rejuvenation of Truth Social, the shares of Digital World Acquisition Corp. (NASDAQ:DWAC) — the special purpose acquisition company (SPAC) with which Truth Social’s parent company has agreed to merge — has actually risen in the last two weeks.  Indeed, since bottoming on April 25, the shareshave climbed more than 15%.

Thus, increased competition from Truth Social and opposition to Musk’s philosophies could lead Tesla’s CEO to either back out of the Twitter deal or seek a much lower takeover price.

Other Issues to Consider for TWTR Stock

Furthermore, also worth noting is that a number of Twitter’s employees have expressed displeasure with Musk’s vision for the company. As a result, I think there’s a small risk that the company, Musk or both will decide to back out of the deal.

Finally, in the long term, Musk’s ideas may greatly improve Twitter’s financial results. But since the world’s richest man intends to take Twitter private, the owners of TWTR stock won’t be able to benefit from such a turnaround.

Thus, given the shares’ poor risk-reward ratio, I recommend that investors sell the stock.

On the date of publication, Larry Ramer held a long position in DWAC stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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