Twitter Downgrades Should Have Been Expected

UPDATE: December 16, 2013, 11: 55 a.m. — While the three major indexes are posting nice gains today, shares of Twitter Inc. (NYSE: TWTR) are down about 3.8% following the two downgrades mentioned below. The stock has traded more than 21 million shares so far this morning, nearly 25% more than its average daily volume of 17 million shares. Twitter’s stock gapped up about 30% last week, so today’s drop is modest by comparison. Twitter’s acquisition of a mobile ad platform last week helped boost its shares, but until the company actually shows some profit, more downgrades could well be in store.

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Twitter Inc. (NYSE: TWTR) managed to score two analyst downgrades from Wall Street Monday morning. This comes on the heels of a serious run up in the stock that seems to have defied logic.

Wells Fargo Securities was the top downgrade on Monday. Twitter was lowered to Underperform from Market Perform, and the fair value price target range was put down at $36 to $39 for the social media and news company.

SunTrust Robinson Humphrey downgraded Twitter as well, which is substantial considering that this was the first Buy rating around the time of the initial public offering (IPO). The team downgraded Twitter to Neutral from Buy in the call.

Twitter shares closed at $59.00 on Friday, and the stock hit a high of $59.41 on that day. The post-IPO trading range is $38.80 to $59.41, and Twitter was worth some $32.1 billion as of Friday’s closing bell. Shares were indicated down almost 2% at $57.91 shortly before the open on Monday.

Maybe trading at more than 50 times sales is just too much for a bunch of CFAs to sign off on. Keep in mind that Twitter is currently expected to lose money on an earnings per share basis in both 2013 and in 2014, and sales are expected to grow from almost $640 million in 2013 to about $1.1 billion in 2014.