Is Twitter Stock Price Bubble Starting to Burst?
Stock Price of Twitter (NYSE:TWTR) went tumbling down last week, losing 13% from its peak price of $73.31; the largest fall since the company went public. The fall was triggered by negative sentiments which resulted due to a downgrade call by a few analysts. The correction was long due, and seems to have been only partially complete. The stock price jump of 245% in two months since its IPO price of $26 a share, was definitely a bubble of sorts and reminds us of the big bubble in technology stocks in the late 90s. Facebook (NASDAQ:FB) - Twitter’s biggest competitor, has witnessed a similar run in 2013, more than doubling its price in the year. We believe the companies are running high on popularity but low on business fundamentals to support such premium valuations. We review what fuels the stock price of Twitter, and whether the business potential can justify its premium valuation.
Twitter v/s Facebook Financial Performance
Twitter’s revenue has grown at more than 100% annual growth rate since last 3 years. Though the growth has been remarkable for the company, it’s on a declining trend, shown in the chart below. The company will have to venture in new products to better monetize its 225 million user base to sustain its high growth. On the earnings front, Twitter is yet to earn money. In comparison, Facebook’s revenue growth trend has increased since its IPO last year, mainly due to better monetization of its mobile user base.
Another important metric to compare the two social media companies is Revenue per user. Advertising being the main source of revenue for both the companies, the revenue per user for the companies are directly comparable. Facebook currently has annual revenue per user of $6.52 with a user base of 1.2 billion. Twitter’s annual revenue per user stands currently at $2.88 with 225 million users worldwide, which is lower than Facebook’s $5 annual revenue per user at the time of its IPO.
The growth in revenue per user had been higher for Twitter ranging between 40%-80% in last three years as compared to 20%-40% for Facebook. However, the trend in revenue per user growth per year has been declining for Twitter as the growth in users is more than the growth in revenue. Facebook’s revenue per user growth had seen a dip in 2012, after which it picked up momentum in 2013. As Facebook has a broader reach than of Twitter currently, it is better positioned to monetize its business and generate higher revenue per user as well as earnings.
Twitter v/s Facebook Valuation
For valuation purposes, we compare the two companies on the basis of the price to sales ratio. As twitter is yet to report positive earnings, comparison on the basis of price to earnings ratio would be irrelevant. We have put in numbers of Linkedln (NYSE:LNKD) as well for comparison purposes.
Twitter’s stock price is trading at an unbelievable sales multiple of 66.1 times. In comparison, Facebook’s price to sales ratio of 19 times, shows the stark difference in valuation between the two. Even if we consider that the price reflects the expected growth rate in revenue for future years, Twitter will have to generate astronomical growth rate to justify the current valuation. And as long as the company is still in the process of monetizing, reaching such growth levels in near future seem less likely.
Averaging the price to sales ratio for Facebook and Linkedln, industry average price to sales ratio stand at 18 times. At expected revenue of $650 million for 2013 and 75% expected growth rate for 2014, Twitter’s justified price comes at $33 a share.
|LTM Revenue in 2013||$534.46M||$6,872.00M||$1,384.94M|
|Price (as on Jan 1, 2014)||$54.65||$63.65||$216.83|
|Price to Sales ratio (P/S)||19.40||66.12||17.84|
Based on Twitter's and Facebook's latest SEC Filings
Considering price to sales ratio of 18 times is way above average for technology industry as a whole. Twitter when valued with such high multiples, shows a further downside risk of 48% to $33 a share, even after the recent 13% fall in stock price.
We at AmigoBulls believe that the high rise of social media stocks runs on their huge popularity among the users worldwide, and not on their fundamentals. However, in times of market corrections, as investors seem to move away from risky investments, these companies will be the worst hit. We therefore believe in fundamental long term investing, and prefer stable profitable companies over the likes of Twitter. You can see the stocks we love here.
To see Twitter’s latest stock price movement, click here (NYSE:TWTR)