Since its Q4 2013 earnings release on the 5th of Feb 2014, Twitter (NYSE:TWTR) has lost nearly $6 billion in market cap, and wiped out over 16% of investor wealth. This is only the tip of the iceberg.
Twitter’s valuation today with a price to sales ratio (PS ratio) of 45, always makes for a controversial debate. While the Twitter bulls swear by its unlimited potential, we think all of that potential and much more is already priced in. We are bearish on Twitter stock based on our Twitter stock analysis
If there’s one thing that Twitter has got bang on, its revenue growth. No critic can find fault with a relentless YoY revenue growth in excess of 100%.
Twitter hasn't seen a single dollar of profit since it went public, or in the last 3 years for that matter. So much so that, if you spend too much time studying Twitter, you might end up believing that ‘operating loss’ and ‘net loss’ are mandatory line items in an income statement.
Since, the company doesn’t make any money at an operating level, discussing cash flows is futile.
The Bigger Concern
Twitter’s Q4 2013 performance has resurrected fears about its limited potential for scale. The company’s user growth has not only slowed in % terms but also in absolute terms, with user addition at its lowest in 3 years. For a revenue model so heavily dependent on advertising, it is a big problem.
A look at comparative valuations tells us how expensive Twitter is in relative terms.
|Price to Sales ratio||45.8||22.4||16.8|
One must note that LinkedIn and Facebook make more than 2 times and 11 times Twitter’s revenue respectively and are far more profitable.
The IPO argument – That’s how it works!
A common argument we come across is that Facebook was just as expensive during its IPO and that in due course, Twitter will follow on its path to greatness.
|Price to sales valuation during IPO||26.46||25.76||15.40|
While that argument holds true, one should not forget that Facebook’s stock price went through a significant correction and has eventually reached where it has. Even at its current price, which we think is expensive, Facebook’s stock price hasn’t doubled, whereas Twitter’s has more than doubled without any change in underlying fundamentals.
It seems inevitable that the stock will have to correct significantly before going the Facebook way.
Further, there are two issues that could directly affect the share price, Twitter share dilution and lock up expiry. Unlike in the case of Facebook, almost all of Twitter’s insiders’ shares are locked up today. The lock up release for about 474 million shares, around 85% of the outstanding shares will come in May 2014, which frankly, is quite a scary thought. That apart, shares could get further diluted by an addition of more than 200 million shares over the next couple of years.
We’ve read a lot about what Twitter could be. A tool to serve as a spying medium for intelligence agencies, topple governments and a whole lot of mind boggling stuff. But we have to say, there’s probably just one thing we know it certainly can’t be right now, and that is, a smart investment option.
Investors might still make money betting on Twitter. We just want to tell you how much you are paying for this lottery ticket.
To see Twitter stock price movement, click here (NYSE:TWTR)