Twitter Inc (NYSE:TWTR) stock has rallied nearly 30% in the last one month. Can the uptrend in TWTR stock continue for now?
Twitter stock is overbought and the upside from here could be limited.
The recent run up in Twitter shares have landed the stock in overbought territory. If one takes a look at the TWTR stock technical chart, both popular momentum indicators Relative Strength Index (RSI) and Bollinger Bands suggest the stock is in overbought zone. The current RSI reading stands at 78.13, well above the commonly used threshold measure of 70. At the same time, in case of Bollinger Bands indicator, Twitter's stock price has breached the upper Bollinger Band. This is commonly considered as a signal of an overbought condition, and is a bearish signal. Based on these technical indicators, the stock could move lower in the coming days.
Twitter has still a long way to go.
The recent rally in Twitter stock would give the impression that things are turning for the better for the Jack Dorsey company. However, the turnaround in Twitter is still far away even though investors are very optimistic given the possibility of GAAP profitability in Q4. The revenues are declining though management's cost-cutting measures are improving the company's bottom line which is a positive. But what about growth? Twitter revenues have gone nowhere in 2017 with YoY revenue declining for consecutive three quarters now. Investors seem to be distracted by the company's major move to increase the tweet limit to 280 characters from 140 and ignoring the fundamental challenges faced by the San Francisco, California-based company.
The overall market sentiment towards Twitter seems to be much better this time around but the stock has seen multiple rallies this year which have failed to sustain. With the larger fundamental challenges ahead, it is difficult again for the stock to continue its uptrend. The one major fundamental challenge for Twitter has been its user growth, which is really an import metric for social media platforms. Twitter lags its peers in a big way when it comes user growth in 2017. Twitter has even fallen behind popular teen chat app Snap Inc (NYSE:SNAP) snapchat. Twitter needs to address this as user growth metric is crucial for attracting more advertisers. With eMarketer forecasting snapchat to overtake Twitter in US ad revenues next year, the management has its task cut out. Twitter's data licensing segment is showing decent growth, rising 22% YoY to $87 million, but it only accounts for 15% of total revenue. The slow pace of user growth has hurt Twitter's advertising revenues which were 8% lower YoY in the third quarter at $503 million.
The upside in Twitter stock from here could be limited given the technical setup and the recent run up in the shares. With recent reports of insider selling doing the rounds, it further gives a negative impression regarding the potential upside from these levels. Taking a long-term view, Twitter still has a lot of work to do as it seems to be lagging its peers on user growth in a big way. The GAAP profitability possibility in Q4 is definitely a positive but when it comes to long-term growth Twitter management still has not got it right. TWTR stock presently trades 6.75 times it sales almost double the industry average, it is really difficult to get convinced whether it deserves the high valuation amidst declining revenues and slow user growth. Investors would be better off to book some profits taking advantage of the recent rally and buying more on a major pullback as observed multiple times in 2017.
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