Stansberry Research

How to Light $44 Billion on Fire

David LashmetStansberry Digest

It's like gutting a football team... Elon Musk has destroyed Twitter... How to light $44 billion on fire... Why content moderation matters... The FTC is coming... Reasons for bankruptcy... How Musk will try to save face (and money)...

Editor's note: Over the next two days, I (Corey McLaughlin) will be handing over the Digest to our colleague and friend Dave Lashmet.

Dave, the editor of Stansberry Venture Technology, called me recently and shared a fascinating take on the state of social media company Twitter, its new owner Elon Musk, and why investors should be wary of a bold claim he might make soon...

Given what Musk has done at Twitter since taking over the company last year, Dave says he is likely to take action to boost his reputation – and finances. And when he does, he'll be using a "house of cards"...

What follows today and tomorrow are Dave's full thoughts – and his warning, which we don't think you'll hear anywhere else...

Last October, the richest man in the world spent $44 billion to buy – and wreck – a social media firm...

I (Dave Lashmet) am talking about when Elon Musk bought Twitter. You know the general story. But to better understand what has happened to the company since the Tesla CEO bought it, consider this thought experiment...

Imagine that you have a chance to buy the Detroit Lions football team... As soon as you take over, you fire everyone on the team except the placekicker and one defensive safety.

Granted, you still own the stadium, merchandising rights to the team logo, and the mascot's costume... But you got rid of 90% of the players... and 90% of the marketing department, 90% of the coaching staff, and even 90% of the janitors.

That'll save you some labor costs, sure. But good luck putting a competitive team on the football field... or selling tickets, merchandise, or new advertising in the stadium or on television... or keeping anything clean.

That's an obvious way to turn a $4.4 billion investment, which is in the ballpark of what NFL teams are worth these days, into a dumpster fire.

Now imagine doing this at 10 times the scale...

If you did this 10 times over – and shed 90% of thousands of staffers – that's what Elon Musk did to Twitter.

This is not a political critique. While some of Elon Musk's critics focus on his personal views, that doesn't concern me. The man could believe in space aliens... or the manifest destiny of sheep. (I don't.) Instead, this is an economic critique, one I feel compelled to make for several reasons...

As I will explain in the Digest today and tomorrow, what Musk has done to Twitter will extend beyond the hit to his own reputation and finances, and to the company's present and future. It will also have implications on the broader markets, specifically for tech investors.

It's hard to know the precise extent of the damage Elon Musk has done within months of taking over Twitter. But I suspect, within a year, this global social media firm will be bankrupt unless it's entirely rebuilt...

I also believe Musk will attempt to do something to try to recoup some of his Twitter losses, though not through what may be the obvious route. This plan might sound great when he talks about it. But I'm here to warn you that it will not be what it appears on the surface.

There's a lot to get to. So, let's jump right in...

Why social media needs content moderation...

Before Elon Musk bought Twitter, it had 7,000 employees and 5,000 contractors. Since he took over, we estimate that roughly 90% of those workers have been laid off, encouraged to quit, or are otherwise no longer affiliated with Twitter. This includes most of its content moderators and its entire media relations and payroll teams.

This has been a major mistake...

Musk knows moderation. He was a power user of Twitter – writing more than 20,000 short missives to millions of followers. Most of these posts have been rational. Some are a bit racy – but he's one guy. He can be subjective.

The problem is, not all speech is safe. Serious, actionable threats to a person's life are one clear limit. For example, U.S. laws limit falsely screaming "fire!" in a movie theater because of the risk of inciting panic.

You probably know that one. But in the age of video cameras in smartphones, there are new dangers... Three big taboos are torture videos, live video streams of criminal acts of violence (like fights or shootings), and/or child pornography.

Globally, there are other taboos. A bloody video of a cow in a slaughterhouse could be banned in India. Likewise, images purporting to show the Prophet Muhammad are banned in some Islamic countries.

Granted, this list of taboos is long – but that's a big part of why a global social media firm has to moderate content.

In any given jurisdiction, Twitter can (and will) face civil or criminal penalties for unmoderated content, like U.S. restrictions against child porn or limits on anti-royal remarks in Thailand...

But that's only part of the problem...

All speech and video is not equally "free." But you know what's also not free: Disney movies and Beatles songs. These are copyrighted assets.

In other words, they are digital property that can only be legally reproduced with payment to the owner. Sure, someone could offer bootlegged CDs, DVDs, or digital streams and downloads. But you can't lawfully be in business while violating copyrights.

Besides such copyright concerns, a third reason to moderate content is to not burn your advertisers. For instance, one of Musk's early Twitter innovations was to let anyone pay $8 for a blue check mark on their account – a designation previously reserved for verified accounts. Someone promptly pretended to be Eli Lilly, a pharmaceutical company that I've written about before in the Digest... and claimed it would start giving away insulin for free.

Wall Street punished Eli Lilly for this message. In one day, the drugmaker lost $5 billion in market cap. Then, a flood of advertisers left Twitter. It wasn't spite, but a response to the lack of moderation in general...

Industry data from November show new advertising dollars coming into Twitter were down nearly 50%. And the best way to monetize a social media network is through advertising. It's not clear how Twitter will recover.

Lost advertising isn't the only problem Twitter faces, though.

There's an equally concerning threat on Twitter's calendar...

Compounding the global, civil, and advertiser risks Twitter faces, the Federal Trade Commission ("FTC") could bury Twitter. An FTC review of the company is ongoing, and the federal agency is likely to slap big fines on Twitter... and perhaps Musk himself.

Way back in 2010, Twitter was accused of failing to safeguard its users' personal data, triggering a decade-plus of FTC oversight.

That's no surprise, when you think about it: Software is not free to write, and servers are not free either.

So if you are getting software for free, then YOU are the product – when information about you is sold. Largely, this is to target advertising to your individual desires... but there are a lot of layers to this onion.

For instance, I once collected prices on antique cars for an article. Now, if there's a car show, I'll get the ads. When we had a newborn, we got ads for diapers. Now, with our kids in college, we get Winnebago ads.

I'm sure you know the drill.

But Twitter apparently overstepped in 2013, according to the FTC, allowing advertisers to use phone numbers and e-mail addresses provided by 140 million users through 2019 – data volunteered to protect their accounts for security – for targeted advertising.

The FTC fined Twitter $150 million for this deception last May... But that's not what matters today.

More trouble is coming...

Last year, amid those allegations, Twitter consented to harsher sanctions. Specifically, any change in Twitter's code that affected personal privacy needed prior outside review. This review is supposed to happen at least once every 12 months and no more than 30 days after a potential violation of this consent decree.

We already know the $8 verification badge got no prior outside review. That's because anyone INSIDE Twitter who would see to this was fired – including most of the lawyers.

In November, at least one Twitter lawyer – while getting fired/resigning – warned other employees that as part of the FTC agreement, the company could be fined billions of dollars for violations.

This has the force of law, and the FTC can name CEOs as liable. That's what they did late last year against the CEO of online alcohol marketplace Drizly. Following several employee departures from Twitter's security, compliance, and legal teams, the FTC said on November 10...

No CEO or company is above the law, and companies must follow our consent decrees. Our revised consent order gives us new tools to ensure compliance, and we are prepared to use them.

The writing is on the wall (or Twitter's timeline, in this case). The FTC has deepened its probe as of December 20. And when Twitter has its next mandatory review of its practices with the FTC, the company will fail, plain and simple. Twitter might try to postpone it, but the FTC will get its review.

And Musk will have to pay, if he's making the decisions. We expect the FTC to decide Twitter's next set of fines within months...

A catalyst for bankruptcy...

Another sign of trouble is that Google just paid $391 million for privacy violations similar to what we've seen from Twitter... That's on top of the $170 million in fines that Google paid for privacy violations in the U.S. back in 2019.

And Google – part of a profitable $1.2 trillion firm – has all the lawyers money can buy. Yet Google had to pay. Even if Twitter is only facing a similar scale of $600 million fines, it won't be able to pay them.

Given that Twitter's consent decree is more onerous, you can expect double or triple what Google paid. Globally, the European Union is also hunting Meta Platforms, owner of Facebook and Instagram, for privacy violations... Twitter could easily be next.

So in the end, it's these regulatory costs – in the face of falling ad revenue – that will bankrupt Twitter.

What will Elon Musk do to counter these financial threats to his new business? He will have to pay... And many investors expect him to sell shares of Tesla to make up for Twitter's losses.

While that assumption might tempt you to short Tesla stock, I don't recommend it. Here's why...

Elon has another way out...

I don't expect Musk to sell more Tesla shares to recoup Twitter's losses. But if he did, it wouldn't be the first time. That's how he bought Twitter in the first place. 

Musk's rounds of selling is one reason Tesla shares fell so dramatically last year. Most tech stocks also fell in 2022 – thanks to inflation, supply bottlenecks, and the war in Ukraine – but Tesla took a bigger hit than many.

When thinking about Tesla's stock price, we need to think about what happens next. For starters, to be fair to Tesla and its shareholders, Tesla is an innovative electric-car company with a history of being forward-thinking and disruptive.

It needs to disrupt again if it wants to stay at the leading edge.

I'm not going to knock the cars, the charging stations, the "Cybertruck," or the battery-pack factories. But in my view, Tesla has less upside today as a growth play as rival firms build compelling electric vehicles like the hot-selling Ford F-150 Lightning.

Nevertheless, Tesla remains the dominant player in electric cars. Indeed, Tesla went from a startup to making a million cars a year, and it's on track to make 1.5 million.

If Tesla refreshes its lineup and can deliver on the long-promised Cybertruck pickup this year (admittedly a big if), then shares could rise in 2023. That's why shorting Tesla now could be a dangerous idea for your portfolio...

Betting against Twitter would be a better idea, but it's privately held and shares were delisted in November.

There's more to the story, though...

In the end, I don't think Elon Musk will have to sell Tesla shares to handle the mess he has created at Twitter. You don't become the richest man in the world for lack of ambition. For him, dollars matter.

And, as I will explain in more detail tomorrow, Musk already has a plan to recoup his billions of dollars of losses in Twitter... It has to do with Tesla. But there's more to this argument than simply saying Tesla stock may rise in 2023 after hitting new lows in 2022.

It's a two-sided story...

Musk has a plan, but I'm here to warn you: Don't believe him. This is a warning that I feel compelled to broadcast to all Digest readers. It's a warning because he's about to sell a house of cards to investors: a $135 billion teetering tower...

I'll be back with the rest of the story tomorrow.

New 52-week highs (as of 1/17/23): Novo Nordisk (NVO), VanEck Oil Services Fund (OIH), and SLB (SLB).

In today's mailbag, feedback on yesterday's Digest, which included notes about high inflation in the 1970s and '80s and why it will be difficult to tame again now – and why that's part of the reason 2023 could really be gold's year... What's on your mind? As always, e-mail us at [email protected].

"Inflation in the 1970's and 80's was difficult to tame, as it will probably be in 2023. However, there is one notable difference in the situation today. In the 1970's organized labor was much more widespread than today. Thanks to numerous strikes, labor was able to get COLA's included in their contracts. When wages went up, prices were raised. The resulting inflation kicked in higher wages, and it went round and round.

"It took a severe recession and widespread job losses before sanity was restored. A byproduct of this vicious circle was the departure of manufacturing jobs from this country as American companies could no longer compete on a cost basis. If you lived through this period you know just how damaging inflation can be." – Paid-up subscriber Lloyd V.

"I keep hearing how hated gold and silver are. So why are most of the central banks buying tons of the Midas metal? 2023 should be the long awaited uptrend breakout of precious metals that justifies the patient diversified investor.

"I've been on a monthly buying program using a set amount to dollar cost average small denomination coins right into a depository. I can tell I'm doing okay because my quarterly fees have been rising. With the small amount allocated each month, I thought I'd have to quit the monthly buy program... but I consider it a gift that I've been able to buy at low prices that have been suppressed by the paper market.

"Being diversified in cash, dividend stocks, energy companies, and metals my portfolio was up 4.5% for 2022! So how do you do it? Just start! Keep at it monthly, and follow the great recommendations by Stansberry... oh and diversify." – Paid-up subscriber Rob C.

Good investing,

Dave Lashmet
Seattle, Washington
January 18, 2023