Twitter Inc. (NYSE: TWTR) proved that the cautious bears were way wrong right after the initial public offering. The microblogging giant sold shares at $26 in the IPO in late 2013, but the lowest this stock’s price has been was $38.80. Then shares rallied all the way up to above $74. Now shares have continued their decent, and the stock just hit a 2014 low.
Twitter was one of the excesses of the great bull market enthusiasm. Now it is getting its turn in the barrel. After closing down at $47.88 on Tuesday, the market cap is still right at $27 billion. That means that the market cap at the peak was around $42 billion.
Valuation is just impossible to justify on a case of logic. That being said, the exact same things was said about Amazon.com Inc. (NASDAQ: AMZN) back in the 2000 tech bubble. Investors are not investing based upon the stock trading at 40-times trailing revenues, nor are they investing in Twitter because it is now “only” about 22 times 2014 expected revenues. They are investing for what the value can be in 2016 to 2018, but so far the year 2014 is telling those investors that they overpaid.
Some analysts still feel that Twitter’s fair value should be in the $20s or $30s. One analyst still has a $72 price target, and the consensus price target from Thomson Reuters is closer to $51, versus the $47.88 close.
Investors are simply turning more cautious, or more rational, toward what they are buying. Companies that want to keep posting losses are being considered more closely rather than just because of a huge market opportunity. Twitter is expected to earn only $0.01 per share in 2014 earnings, followed by $0.21 per share in 2015. The hope is that the microblogging format will reach several dollars per share by 2018 to 2020.
Again, this is supposed to be the reason(s) people are SELLING rather than buying.
Some of the media feel that Twitter demonetizes their content and efforts. This is single-handedly the biggest risk that exists long-term for Twitter, at least that is the largest risk we see right after potential social media burnout down the road. How those who do not want their own content produced being ripped off or avoided completely will fight back- or even if they fight back – remains to be seen, but it is a risk and it is one of the reasons we think the stock’s fall has continued.
The flip-side of the argument is that Twitter can help take down nations, it can help entertainers and politicians get a message out to millions instantly without a single phone call, and it can get a message out almost entirely usurping the maze of the giant internet.
The last negative on Twitter is the huge IPO lockup expiration. On May 6, there will be in excess of 400 million shares which are finally free to be sold. Of course nowhere close to that number of shares will be sold, but it is a large enough number that very few market pundits want to try defending the stock.
How low Twitter’s stock goes depends on a myriad of things which may be outside of traditional analysis. Maybe this notification is a signal that a bottom is near, or maybe not.