Can Elon Musk prevent X’s downfall?

Elon Musk’s outburst reignites X’s survival concerns.

Upon assuming control of the then-Twitter last October, the world’s wealthiest individual inherited a historically unprofitable enterprise. Despite its prior lack of heavy debt, the acquisition altered that trajectory. Partially financed by a $13 billion debt injection, this obligation now burdens X’s balance sheet, necessitating quarterly payments of $300 million due by January’s end.

Musk’s previous statement in November, following a 50% reduction in staff, hinted at the possibility of bankruptcy. Examining X’s financial past reveals a bleak picture—Twitter reported negative free cashflow of $370.4 million in 2021, indicating expenditure surpassing revenue.

No visible change emerged. Musk’s July post on X highlighted the root of the platform’s financial crisis: “Due to ~50% drop in advertising revenue plus heavy debt load.”

X’s CEO, Linda Yaccarino, reportedly informed lenders recently that the company remains cashflow positive except for debt servicing costs, a significant caveat.

The platform is burdened with debt, and the collapse of advertising revenue necessary to service it ensued. Despite Musk’s intent to transform it into an “everything app,” advertising constituted nearly 90% of revenue in its previous ownership.

As soon as Musk assumed control, the flow of advertising revenue faltered. His management decisions and posts on X continually deter advertisers. These decisions include a mishandled user certification change resulting in numerous impersonator accounts, staff layoffs, reinstating controversial users like Andrew Tate, managing hate speech, and, notably, Musk’s endorsement of an antisemitic statement on X.

Frustrations over advertiser boycotts, including recent halts by major brands like Apple, Disney, and IBM after Musk’s post, led to X suing campaign groups and Musk’s confrontational message to hesitant advertisers on Wednesday.

Following the recent Musk outburst, Mike Proulx, a research director at Forrester, emphasized that the billionaire stands as X’s foremost issue. Proulx stated, “It is not advertisers poised to terminate the company; rather, it is Musk’s ongoing string of ill-advised business decisions systematically dismantling it. His remarks from last night will only further expel revenue.”

If advertisers persist in their reluctance to re-engage post-outburst, Musk’s avenues to sustain the business narrow. Options include negotiating with lenders regarding the debt load or injecting more personal funds into the company.

Musk invested over $20 billion from his estimated $220 billion wealth to acquire X, and in 2022, he sold $23 billion worth of Tesla shares, ostensibly to cover that expense.

Although he retains the option to sell more Tesla shares, a substantial portion has been pledged “to secure certain personal indebtedness.” Despite Musk’s previous statement in 2022 that he wouldn’t sell additional stock for “probably two years,” Ben Silverman, VerityData’s research director, estimates he could still sell approximately $109 billion worth of Tesla shares.

When queried by Andrew Ross Sorkin, whom Musk amusingly referred to as “Jonathan” at one point on Wednesday, about using his personal wealth to support the business, Musk refrained from confirming any intention, asserting that if X failed, it would be due to “advertisers bankrupting the company.”

Brian Quinn, a professor at Boston College law school, suggested that lenders, aiming to maintain a rapport with Musk and his other ventures, might refrain from hastening X’s demise. “Instead of doing that, they might opt to renegotiate terms to sustain the broader relationship and allow the business to continue in a struggling state,” Quinn mentioned. “Alternatively, the wealthiest person alive could acknowledge that his acquisition was the world’s most significant vanity project and write a personal check.”

Musk’s statements on Wednesday have made it highly improbable that advertisers will contribute to avoiding the worst-case scenario.