Why analysts are tepid on Twitter

The social media stock surged in its first day of trading. But in the month since, shares have gained only 5 cents.

By The Fiscal Times Dec 9, 2013 12:49PM

By Jonathan Berr


Shares of Twitter (TWTR) surged 73 percent in their first day of trading Nov. 7, jumping from an IPO price of $26 to close at $44.90. In the month since that market debut, the stock price has gained just 5 cents.


Even that meager increase is impressive compared with, say, Facebook's (FB) first month of trading, in which the social networking giant’s stock plunged 20 percent.


And Twitter's performance is all the more remarkable given that skeptics continue to raise questions about whether its growth rates are sustainable and whether expectations that it will be profitable in 2015 are realistic.


Anup Sirivastava, an associate professor of accounting at Northwestern University’s Kellogg School of Management, noted that profitability can be a "vague" concept. “A more valid question is -- can Twitter generate positive free cash flows in 2015,” he wrote in an email. “And the answer is an emphatic no.”


As Twitter itself noted in its IPO filing, challenges abound. The company had about 232 million monthly users in the three months that ended Sept. 30, a 39 percent year-over-year increase.


Not surprisingly, Twitter expects to run into what financial pundits have dubbed “the law of large numbers,” whereby the bigger a company gets the harder for it is to grow.


Twitter also is expensive to operate. Total costs and expenses were $95.7 million in 2010 and more than quadrupled to $394 million in 2012. Odds are that they will continue to skyrocket as the company buys more servers to meet the growing demand for its service, continues to surge both in the U.S. and overseas and adds employees in key areas such as advertising sales.


Twitter skeptics include analysts at some of the very underwriters who took the company public. Analysts for Twitter’s five lead underwriters initiated coverage on the San Francisco company last Monday, on the first day after the so-called quiet period around the stock expired.

Those five took very divergent views on the stock.


As The Wall Street Journal noted, only two -- Goldman Sachs and Deutsche Bank -- initiated coverage on the microblogging site with a “buy.” Two others -- Morgan Stanley and J.P. Morgan -- issued neutral recommendations. Bank of America Merrill Lynch analyst Justin Pope, noting the company’s “attractive growth but unattractive valuation,” seemed far more impressed by the Twitter service than the company’s stock. He rated the shares “underperform,” the equivalent of a “sell.”


By conventional stock valuation measures, Twitter is clearly expensive. Since it doesn’t make money, investors can’t use the traditional metric of price-to-earnings ratio to measure the stock’s value. But the shares trade at 41.9 times sales, well above Facebook’s 16.2 multiple.


“Twitter's current valuation cannot be justified by its fundamentals,” Sirivastava writes. “The growth implicit in current valuation is not impossible to achieve, but is improbable. The question is not whether Twitter will one day be profitable. The question is what kinds of profits it needs to generate to justify its current valuation. These levels are too optimistic given any realistic growth trajectory.”

Other analysts still have high hopes for Twitter. Indeed, Deutsche Bank is forecasting that Twitter can achieve a compound annual growth rate of 30 percent with revenue hitting $1.5 billion in 2015, more than double the $640.19 million analysts are forecasting for 2013.


Whether it can achieve those growth rates or not, Twitter does have plenty going for it. Analysts are impressed that the company has become an integral part of many television shows and think it has potential for growth in retail. They also note its strong foothold in mobile given how many access the site with their tablets and smartphones.


Still, the question of profitability is bound to linger for a while. S&P Capital analyst Scott Kessler expects Twitter’s 2015 profit according to generally accepted accounting principals to be “modest.” He sees a tough road ahead for Twitter and expects it to lose 30 cents per share in 2013 and 14 cents a share in 2014.


“We think in many ways Twitter has a nice global platform,” he said. Kessler warned, though, that, “social media, technology and tastes do change. They can in many cases unexpectedly and quickly.”


Top Reads of The Fiscal Times


13Comments
Dec 9, 2013 2:11PM
avatar
What exactly does Twitter make?  What service do they provide that adds any real value to the economy?

Has it really come to this?  Our economy is now based on how many ads we can put in front of one another?

"You click on my ad and I'll click on your ad and we'll both get rich!"

Seriously, we can't build a viable, sustainable economy like this.

Dec 9, 2013 1:22PM
avatar

Why Wall Street Analysts Are Tepid on Twitter?

 

Pretty simple, we have a social advertising and networking bubble! You want to see Google crash to $500 per share just click ON Bing or Yahoo and turn off Google. A mobile click is worth $.000001

Dec 9, 2013 2:52PM
avatar
We used to have one person speak for the FED.  And now we have all of the governors piping in on these QE programs.  And they all seem to have a differnet opinion of what should happen. They all need to share in the love.  Being a FED governor is a very important political postion.  And it looks like at least three will now enter stage left, do their little ditty, and exit stage right.  This is all theater now. 
Dec 9, 2013 2:34PM
avatar
Wall Street cats gotta laugh at some of the shidt people will buy.  Unless of course you are a fund and maybe putting two percent into these Microsoft, Amazon, or Apple eventual wanna bs.  Any retail person not exceedingly rich or diversified should give these issues a great big pass.  We had these trader darlings in the 90's as well.  And where did they end down?  Lets see Ciena was at 120 and it settled at about a buck 38.  Emulux was at 180 and I think ended up at 13.  And Palm opened as high as 180 and did a ten fold reverse split at $2 just to not be delisted.  Just some thoughts for folks younger than me who haven't seen this hustle before.  JMHO
Dec 9, 2013 5:41PM
avatar

NO scumbag or manipulator actions today...Seemed like a pretty good day down here on the floor.

Kind of a Flat Day, with good action on the upside for the RUT2K or small caps...

Other equities mixed with some nice 1-2.5% upside on certain issues or Sectors...


Probably the same ones that were taking some beatings over the past week-10 days or so.

FED is acting somewhat mild and closed mouth, more than likely because of changing of the guard.


Dec 10, 2013 11:52AM
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I don't know why really, but Twitter stock holders have made a butt-load of money the last two days.
Dec 10, 2013 3:49AM
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It is literally Ridiculous to say Twitter is up since the IPO. That rise was only for a select group of folks, the rest have literally lost Money. So until this Crap Company breaks the initial opening price, it's a LOSER. Twitter is basically a way for Celebrities to waste time when they aren't cheating on their spouse, making bad movies, misreporting the news, and or writing bad music. So they will always promote this time wasting thing we call Twitter. However, now that Twitter has Billions, they can go out and Buy Reals Companies that actually make a profit. Without that, the $1Bil loan and proceeds from the IPO,  they would literally be Bankrupt sooner than later.
Dec 9, 2013 3:09PM
avatar

Who cares about Cramer.?? Jonathan Berr has written a decent and timely article....


So far about only 3 comments out of 9 have been about the article content...

So it really doesn't seem to matter what or who writes an Article or the Piece.

 

MSN realizes that fact, so as to cut expenses you will see less and less in-depth reports or articles.

Young writers or young analysts, printing or parroting opinions...From less costly sources.

It's happened before, and is in process now...

Dec 9, 2013 2:46PM
avatar

Maybe Cramers on a break....Or waiting for the FED to say something concrete...??


The quiet time has elapsed for Twitter, now in a few more weeks with a secondary offer or trading freed up by the underwriters...

Then maybe we will see the "value" in the Company....Stay tuned.

Dec 9, 2013 2:53PM
avatar

Seen in a dream...Must be true.


Seth MacFarlane, got ran over by a white Prius...

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