- Twitter stock has corrected over 50% from its peak price in December.
- Slowing user metrics and share lock-up expiry are important factors for the selling pressure over the last few months.
- Twitter continues to trade in an overvalued and high risk territory in spite of a tremendous growth story.
Twitter (NYSE:TWTR) is a company with an absolutely great growth story going for it. However, the stock has of late become the playground of traders, who have used its highly overpriced stock to take positions irrespective of the underlying fundamentals. The stock price movement ever since its IPO has been fuelled by trading activity, which was evident from the company’s Q1 2014 results and the stock movement following that.
Solid revenue growth contrasted with free fall in stock price
Twitter announced its Q1 numbers on April 29th 2014, in what was its first earnings call post IPO. The reported numbers are summarised below, as given in the Q1 earnings release.
- Q1 revenue of $250 million, up 119% year-over-year
- Q1 net loss of $132 million and non-GAAP net income of $183 thousand
- Q1 GAAP EPS of ($0.23) and non-GAAP EPS of $0.00
- Q1 adjusted EBITDA of $37 million, representing an adjusted EBITDA margin of 15%
These were numbers generated on a historic growth which has remained well over 100%. Twitter’s Y/Y revenue growth is displayed in the chart below.
The numbers were absolutely good, canvassed on the fact that Twitter is a growth name and hence topline growth is what would be valued more. Apart from the phenomenal topline growth, which is an indicator of the effectiveness of Twitter’s monetization strategy, the quarter also saw Twitter report its first Non-GAAP profits in its history. 119% Y/Y revenue growth and first adjusted profits is something that would cheer growth investors. Twitter’s stock story post Q1 results has been starkly different.
The stock price of Twitter is down 19% since the day it announced its Q1 2014 results. The major cause has been rumored to be the slowdown in number of unique visitors added. However, there have been various factors which have led the stock to where it is today. The biggest reason is that the stock did not merit a rise in stock price to the levels of $70’s, a level which sent Twitter’s already pricey valuation multiples into the stratosphere. The valuations at those prices left only one way where the stock could be headed. DOWN!!
The irrational exuberance was a function of the short term mentality of traders in general, as a fundamentalist wouldn't have touched Twitter’s stock given its financials. Warren Buffett says ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’ and unfortunately Twitter currently fits the billing of a fair company at a wonderfully high price.
In our earlier post, we had highlighted Twitter's share-lock up expiry and the slowing user growth metrics, as the two factors which will bring the Twitter stock price closer to reality. The slowing user growth metrics were reconfirmed in the Q1 2013 results. The stock price movement off the lock up expiry, down 16% since May 6th, is yet another confirmation of our earlier fears. With the sudden increase in the selling pressure, it is no surprise that Twitter stock has nosedived over the past few quarters. The important question is where is Twitter stock price headed from here? We believe Twitter is still expensively priced and there is still a long way to go before the stock price reflects a more realistic picture of the company underlying.
Downside risk continues to remain high
Has Twitter reached the bottom? Well, we think that Twitter today continues to be insanely overvalued, which is reflected in its valuation multiples. As the company isn’t profitable on a net level, we look at the price-to-sales multiple and compare that against that of Facebook. The following chart compares the Price-to-sales multiple of Twitter and Facebook over the last few months.
Twitter currently has a last twelve month (LTM) P/S multiple of 23.42, which is higher than Facebook's (NASDAQ:FB) peak P/S multiple of 22.5 on March 10, 2014. Facebook, with its huge earnings growth and scale of operation, hasn’t ever traded at the valuation levels Twitter is trading at today. While there may be people looking at Twitter’s current price levels as a potential entry point post the 52% fall from its peak price in December 2014, we think the stock today continues to trade in high risk territory. Any entry into the stock would qualify as a trade rather than an investment as trading activity is what will sustain these sort of valuations and price levels.
We reiterate our negative long term outlook on Twitter stock. View our Twitter analysis here. We think Facebook stock is a far better option for an investor looking for an exposure to the online social networking sector. View our Facebook stock analysis here.
To see Twitter’s latest stock price movement, click here (NYSE:TWTR)