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Is Twitter Stock Price Bubble Starting to Burst?

Is Twitter Stock Price Bubble Starting to Burst?

posted by Neena Lakhmani | published by Amigobulls on
  • Twitter stock tumbles by 13% from peak, the largest fall since Twitter IPO.
  • Twitter is yet to show profits.
  • Twitter is overpriced, and a further correction in stock price is likely.

Twitter's bubble 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.

Annual Revenue Growth for Facebook and Twitter
Based on Twitter's and Facebook's latest SEC Filings

 

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.

 

Revenue per user of Twitter and Facebook
Based on Twitter's and Facebook's latest SEC Filings

 

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. Based on our Twitter stock analysis, we feel that 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.

 

Facebook Twitter LinkedIn
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

 

Conclusion

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 our top stock picks.

 

To see Twitter’s latest stock price movement, click here (NYSE:TWTR)

 

Disclaimer: We do not hold any stake in the aforesaid stocks. Please read our detailed disclaimer.

About the author

Neena Lakhmani
Neena Lakhmani is a Financial Analyst at Amigobulls. She loves analyzing financial statements, identifying key business performance drivers and performing valuation analysis of companies. US Technology Industry is where Neena is at home. Neena is a CFA Level 3 candidate and her areas of interest are Financial Modelling and Portfolio Management. Connect with her at neena.lakhmani AT amigobulls.com.
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recent comments

neena.lakhmani profile picture
neena.lakhmani
Firstly, Twitter and Facebook are peers with same ad based revenues models. Sure, both can co-exist but they still compete for the same ad dollars. As Twitter is not yet profitable, relative valuation with a peer company is the best alternative IMO. Facebook is the closest we found to compare with. If you have any other company in mind, which Twitter can be compared against, please let us know. Also, what are your views at Twitter trading at $57 now?
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Anonymous profile picture
Anonymous
Sorry, I just consider this whole analysis a little amateurish. At the fund I work at, my PM would scoff at this, and tell me I wasted my time comparing data in an irrelevant manner. It also does a disservice to novice investors who read this without having yet developed the critical reasoning skills necessary to sort through good and bad information in the course of their research.

Also, Twitter should not be considered Facebook's biggest competitor. They are two different companies that serve different purposes in the social media sector. Both can coexist. It is not a Facebook - MySpace scenario.
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neena.lakhmani profile picture
neena.lakhmani
Thanks for you views. Feedback is always appreciaciated.
We have done the analysis considering the respective IPO years of the Twitter & Facebook.
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Anonymous profile picture
Anonymous
This whole analysis is irrelevant. You are comparing Facebook which is in a much later stage of growth to Twitter's current state. Why don't you go and see what Facebook's growth and revenue per users looked like 2 - 3 years ago. That would put Facebook on the same growth curve as Twitter making the two comparable. This currently is an apples to oranges comparison. Comparing the revenue per user and revenue growth of each company in the same year is ridiculous, as Facebook already has a 2-3 year head start on Twitter and in the world of fast growing tech companies, 2 years is an eternity.

Although I haven't looked into it, I'm sure 3 years ago, Facebook also probably had a 300% growth rate with a declining trend, much like Twitter does now.
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Neena Lakhmani profile picture
Neena Lakhmani
Hi Gary
Thanks for your comments. I agree. As Twitter does not generate earnings, making price to earnings ratio irrelevant, there is no option but to value it on Price to sales ratio. Social media companies thrive on expectations and popularity, thus causing a bubble. Your link for Twitter metric is very useful, thanks for that!
Please feel free to comment.
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GaryFitton007 profile picture
GaryFitton007
What is worse is the whole ridiculus valuation metric of price to sales. The metric is irrelevent as all that matters is earnings. In reality Twitter is not even a $5 stock when using proper valuation metrics and not metrics used to ramp the stock price. On users like many I know lots of Facebook users, but very, very few Twitter users. And of the Twitter users, many are either not active or closed their account. Then we move onto Twitters definition of MAU of 1 tweet per month!!! That is utterly ridiculus and when using a more sensible approach then the MAU is much lower. I include a good link for Twitter user data below

http://twopcharts.com/twitteractivitymon...

Anyone buying Teitter to hold is enriching the insiders who will want to sell to them at these daft prices, and guaranteeing capital losses for themselves.

In the end social media is advertising based revenue models, and as such should trade inline with other media outlets. This is another bubble, just like the newspaper bubble, and the TV bubble, but much, much bigger. And doomed to end up at the same valuation metrics. Maybe less since I don't know anyone who finds the adverts anything more than an irritation.

Finally I would point out the Beyonce exposed the fatal flaw in social media business plans, as she used it for free word of mouth advertising
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