- Short interest in Twitter has reached its all time high.
- Analysts have lowered their FY16 and FY17 revenue revisions.
- This may not be a good time to buy Twitter.
Twitter (NYSE:TWTR) has had a harrowing year so far. Its shares have plunged by about 60% in value over the last 12 months and about 40% year-to-date on the back of slowing growth. To make things worse for shareholders, short interest in the company has spiked by 40% over the past month alone and created an all time high. So what does this mean for shareholders and why is the market betting against Twitter? Let’s take a look.
Short interest data
I’d like to point out to readers that short interest is essentially the aggregate number of short positions that are yet to be covered. Usually, a sharp rise in the short interest of a company indicates that traders and speculators are hoping that its share value would decline substantially going forward. Similarly, a sharp decline in the metric indicates that market participants no longer expect a downside in its stock. The metric basically illustrates the general market sentiment relating to any particular company’s stock.
Now let’s talk about Twitter in this regard; the chart attached above illustrates its short interest scenario. It’s evident that there has been a net addition of 22.15 million short positions over a period of just one month. This number may not mean much in isolation, so to put things in perspective, about 13.4% of Twitter’s entire floating stock stood shorted at the end of FINRA’s last reporting cycle, drastically up from 8.7% in February.
There also appears to be ample liquidity in the stock to comfortably furnish a wide-scale short covering. The chart attached below illustrates that the time required to cover all short positions stands at just 3.1 days according to the average liquidity levels of the last cycle. This isn’t anywhere close to its record highs which rules out the possibility of a potential short squeeze, at least for the time being.
However, the key thing to note here is that short positions in the company have continued to pile up even though its shares have been making new lows consistently. This essentially suggests that:
- Traders and speculators believe that further downside is on the cards
- Market participants think that Twitter stock hasn’t bottomed yet
- A minor rally could potentially attract more short sellers
- It’s not the best time to buy Twitter stock with so much selling pressure
Now, the question at hand is: Why are shorts circling around Twitter and what lies ahead for shareholders?
Also read: Twitter Inc Shares May Have Hit The Bottom
Growth story gone bad
For starters, Twitter is trading at a high valuation of 4-times it’s sales. Companies with such high valuations are generally expected to deliver robust and sustainable growth or market participants start to think that the company’s premium is no longer justified. However, this expectation game is exactly what’s hurting Twitter.
Twitter’s user growth appears to have plateaued as evident in the chart above. The company isn’t profitable yet, and with the number of users not growing, it’s chances of becoming a profitable enterprise anytime soon have reduced drastically. This doesn’t provide any sense of comfort to its investors who were hoping for the growth company to hit breakeven in the near future.
Twitter is still a small company, yet it’s struggling to grow its user base. This somewhat suggests that the company doesn’t have much scope for inorganic growth from hereon. The micro-blogging company will now have to try to monetize its existing users in order to post continued top-line growth, which may be limited.
Consequently, analyst consensus relating to the company has been trending downwards for the most part of this year. The chart attached above illustrates that revenue revisions for FY16 and FY17 have mostly been on the downside which is a particularly discouraging sign for growth investors.
What lies ahead
It’s worth noting that short interest has spiked before and after Twitter posted its earnings. This basically suggests that the market is still extremely bearish on the company, at least for the time being, and that further downside in its stock may very well be on the cards. This may not be a good time to buy Twitter.
Also see Amigobulls' Twitter stock analysis video for a quick look at key financials, in under 90 seconds.