San Francisco: Global investment firm Fidelity has drastically reduced the valuation of its stake in X, formerly known as Twitter, by 78.7%, suggesting the social media platform’s overall valuation has plummeted to just $9.4 billion. This stark contrast to its original $44 billion purchase price in October 2022 highlights the challenges Elon Musk’s platform faces in maintaining investor confidence amid its transition.

Background: The Musk-Twitter Drama

When Elon Musk acquired Twitter for $44 billion in October 2022, it came after months of dramatic negotiations and legal threats. The deal marked the billionaire’s foray into social media ownership, with a vision to transform the platform into an “everything app” under the new brand, X. Despite high hopes, Musk’s purchase was controversial from the start, with critics questioning the hefty price tag and Musk’s vision for the company.

Initially celebrated for its potential to revolutionize the social media space, X quickly became embroiled in controversy due to a series of disruptive decisions made by Musk. From radical changes in content moderation policies to a major overhaul in its revenue model, X has been struggling to find its footing amid the noise.

Fidelity’s Repeated Valuation Cuts

Fidelity’s recent filing, which now values its stake in X at approximately $4.18 million, comes as another significant markdown in the platform’s worth. As of July, Fidelity valued its shares in X at around $5.5 million. The investment firm has been gradually reducing its valuation of X since January this year, when it first marked down its investment in Musk-run X Holdings by 71.5% from its original value.

Fidelity had initially invested $300 million in X Corp in October 2022 when Musk completed the acquisition. In 2023, the firm slashed the social media platform’s valuation by 65%, and now, with a further reduction of 79%, X’s value has plummeted to a fraction of its original purchase price. This move reflects investor concerns over X’s future growth prospects and profitability.

Declining User Base and Revenue Woes

Since Musk’s takeover, X has seen a significant drop in its user base, largely due to a combination of platform instability, controversial content moderation decisions, and the introduction of paid subscription models that failed to capture user interest. Despite Musk’s attempt to introduce new features and incentives for creators and users, the company has struggled to retain its core audience.

Musk’s decision to dismantle the legacy blue-check verification system in favor of a paid subscription model has also contributed to confusion and frustration among users. The shift away from ad-based revenue toward subscription-based models has not gained enough traction to offset the declining advertising income, which has historically been the platform’s lifeblood.

Additionally, several major advertisers have pulled their spending from the platform, citing concerns over brand safety due to the chaotic changes in content moderation and the rise of unchecked misinformation and hate speech on the platform. The loss of advertising revenue has further strained the company’s financial health, raising questions about its long-term sustainability.

X’s Future Vision: The “Everything App”

Despite these challenges, Musk remains steadfast in his ambition to transform X into a super-app akin to China’s WeChat. His vision for X includes offering a wide range of services, from social networking and news to e-commerce, financial services, and even ride-hailing. Musk has repeatedly stated that the future of X lies in its potential to become an “everything app” that goes beyond just a social media platform.

However, the path to realizing this vision remains fraught with difficulties. For one, X will need to secure significant investments to fund the development of these additional services, all while contending with its current financial struggles. Investors and analysts alike have expressed skepticism over whether Musk can successfully turn the tide and restore the platform to profitability.

Musk’s Mounting Financial Pressure

Musk’s acquisition of Twitter (now X) was partly financed through $13 billion in loans, which included $6.5 billion of term loans, $6 billion of senior and junior bonds, and a $500 million revolving credit line. At the time of the acquisition, Musk reassured lenders that they would not lose money on the deal. However, recent reports suggest that lenders may struggle to recover even 60 cents on the dollar for the bonds and loans associated with the acquisition.

In light of the platform’s declining value, these debts have become a mounting financial pressure on Musk and X Corp. With investor confidence eroding and the company facing major operational challenges, Musk’s ambitious plans for the platform are at risk. The debt burden alone could make it increasingly difficult for Musk to secure additional funding or make strategic investments necessary for the platform’s transformation.

Impact on Musk’s Broader Business Empire

Fidelity’s markdown of X’s valuation is not an isolated incident for Musk, whose other ventures are facing varying levels of success and scrutiny. Earlier this year, Musk-run artificial intelligence (AI) company xAI raised $6 billion to accelerate the research and development of future technologies. The pre-money valuation of xAI was pegged at $18 billion, with Fidelity being one of the key investors. The AI company also introduced its own chatbot called “Grok,” which aims to compete with other advanced AI systems.

While Musk’s AI and space ventures, including Tesla and SpaceX, continue to thrive and attract significant investment, X’s struggles highlight the challenges Musk faces in juggling multiple ambitious projects simultaneously. Investors may begin to question whether Musk’s leadership, spread across such a wide range of industries, can effectively drive success in each venture.

Competition in the Social Media Space

The social media landscape has also grown increasingly competitive since Musk’s acquisition of Twitter. Rival platforms like Meta’s Threads, Instagram, and TikTok have continued to expand their user base and introduce new features designed to capture the attention of disillusioned X users. With its competitors thriving and introducing innovative content creation and monetization strategies, X’s relative stagnation becomes even more apparent.

Meta’s Threads, in particular, has been seen as a potential alternative for users fleeing X due to its straightforward, Twitter-like functionality combined with a more stable and advertiser-friendly environment. In contrast, X has struggled to establish a clear value proposition for both users and advertisers, leading to further erosion of its market share.

Future Prospects: Can Musk Turn It Around?

While the situation at X looks grim, Elon Musk has proven time and again that he is a visionary capable of defying expectations. His leadership has transformed Tesla into one of the most valuable automakers in the world, and SpaceX continues to push the boundaries of space exploration. For X, Musk will need to leverage his reputation as a disruptor to convince both investors and users that his vision for the platform can still be realized.

To revitalize X, Musk may need to refocus the company’s strategy, improve user engagement, and restore advertiser confidence. This could involve reversing some of the more unpopular decisions, such as the dismantling of free verification, and recommitting to ensuring brand safety on the platform. Additionally, securing fresh capital to fund the expansion into new services, such as financial products or e-commerce, could be key to unlocking X’s future potential.

Conclusion

Fidelity’s drastic reduction in X’s valuation serves as a stark reminder of the challenges the platform faces under Musk’s ownership. While Musk’s ambitions for X remain grand, the road ahead will require significant changes and a renewed focus on both profitability and user satisfaction. With competitors nipping at X’s heels and financial pressures mounting, the next few months will be crucial in determining whether Musk can steer the platform back to success or if X will continue its downward trajectory.

Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

1st October, 2024