Aug. 25, 2022

Does Twitter Fudge The Numbers?

At the beginning of the Academy Awards, a person dressed in a business suit carefully hands the host a sealed envelope. This person is the Auditor. If you've ever noticed those are the award tallies. Hired by the Academy, it's the Auditors responsibility to ensure that the results are fair and honest. An accurate accounting of each category winner.

The Audit is the fundamental process upon which our entire financial system relies. Every publicly traded corporation must present its annual financial report and undergo the scrutiny of a complete and thorough audit.

As a financial officer at a broker-dealer, I have been through many audits; I can tell you that this is a time-consuming, often grueling, process. If done correctly, the Auditor is in complete control. And for two days or more, you are literally at the Auditor's beck and call. Whatever document, or receipt they ask for, you must produce. So, as long as they are in the office, regular business comes to a screeching halt until the Auditor is satisfied.

You know what I mean if you've been through an audit.

Suppose I told you that a significant stock market sector does not stand for an audit in the most critical area of their business.

And this lack of Audit is Elon Musk's allegation against Twitter, the big social media website. As you know, Musk offered to purchase Twitter for $44 billion. A sum that he judged equitable based on Twitter's ability to generate revenue.

Twitter generates revenue through a process called Pay Per Click Advertising. Twitter provides a website where advertisers can receive "clicks" responses to their ads. The advertiser is then billed so much per click, and Twitter makes that revenue.

Pay Per Click Advertising has become a dominant form of ad marketing throughout the world wide web. Perhaps a somewhat simplistic example, but much internet advertising takes place just like way. It all rests on the basic assumption that people, potential buyers of the advertiser's goods or services, click through to the advertiser's sale page.

However, Musk raises the essential question: what if they're not people? What if they are merely bots, computer-generated clicks designed to look like people when in reality, they are just computer programs, spam bots, in the words of Elon Musk?

Musk withdrew his offer to purchase Twitter mainly based on his assertion that up to 5% of Twitter's total user volume, and thus clicks, are just spam bots. Simple math would then make his offer as $2.5 billion above fair market value.

On July 8th, when Musk announced that he was withdrawing his offer, the media marched out a series of legal experts claiming that the agreement was rock solid and the courts would not allow Musk to terminate.

I'm no lawyer, but it seems that a material misrepresentation on the part of Twitter would be enough to nullify. And if those misstatements were intentional and therefore fraudulent, that certainly would be sufficient.

All of this is going to court. The trial will begin on October 17th, and I'll follow it here with you.

But no matter how this proceeds, Elon Musk has successfully challenged the basic premise of Paid Per Click Advertising. Could it be true that spam bots represent a substantial portion of internet traffic? Musk thinks it's 5% at Twitter.

Just assume, for the moment, that he's correct and about 5% of all traffic is fake throughout the internet. And I have seen estimates that bot traffic is much higher than this.

Think of what this might mean for investors. Do you have social media companies in your portfolio? Companies like Facebook, Pinterest, or Snap? Or other companies who use the Pay Per Click Model, and yes, I'm thinking of their granddaddy, Alphabet Google.

An instant, across-the-board 5% hit to revenue would be devastating. It would affect not only current income but also all future projections. I believe it would be enough to lower this entire sector's share price level.

So, don't be surprised to see Twitter pursue their lawsuit against Musk with everything they've got. They are fighting not only for themselves, but for an entire way of doing business.

 

Economic News

 

One more sign this morning that the Biden Transition to Green Energy is not working. Bloomberg is reporting that 20 million homes are not paying their electric bills.

People are reacting to President Biden's "transition" to Green Energy. It's the Administration's effort to move people away from traditional electric power generation toward new renewable sources of electricity. Their strategy is to increase the price of coal, natural gas, and n power, making renewables more attractive.

Unfortunately, by raising the price of traditionally sourced electricity, which represents over 80% of the market, they are making electricity too expensive for many. The cost of Biden's Green Energy Transition may be the loss of power for 20 million homes.

Today's headline news will be the second estimate of the nation's GDP. The report came in at a six-tenths percent decline, slightly better than estimates. But it is still showing that the economy is contracting. Generally, a sign that the country is in recession. We will get the third and final estimate for GDP on September 29th.

In earnings reported so far, we've had three retailers report. Unfortunately, all are trading lower on their results: Discounters Dollar General and Dollar Tree are both lower, as is Burlington Stores. These market moves don't bode well for retail.

Also, reporting has been Peloton Interactive, the maker of high-end fitness equipment, is trading lower.

Marvel Technology, Workaday, and Ulta Beauty will report later in the day.