Analyst: Twitter Cult Valuation Is Hard to Justify
Twitter (NYSE:TWTR) closed on Christmas eve at $69.85 per share, up 8.13 percent over the course of the half day and up 71.55 percent since the beginning of December. The social media company, which will close its fiscal year on December 31, closed the day with a market cap of $38.05 billion.
If you ask Wunderlich Securities analyst Blake Harper, he would probably tell you that this valuation is difficult, if not downright impossible, to justify with the kind of level-headed reasoning expected of investors. Harper recently reiterated a Sell rating on Twitter stock, and in a note seen by StreetInsider, he argued that although there is momentum behind Twitter, the market appears to simply be ignoring traditional valuation metrics, and finding any excuse to be bullishly.
“While the company is growing revenues faster than its fastest growing peers and we do recognize the potential for the company to capture larger portions of the mobile and TV advertising market, it appears valuation metrics are irrelevant and that investors are betting aggressively on Twitter being the next great media-technology platform,” Harper wrote.
The fact that Twitter is “very expensive” hasn’t escaped even the bullish analysts, which Harper argues have helped form what amounts to a cult surrounding the stock. Goldman Sachs, the lead underwriter on the IPO, initiated coverage of Twitter at a Buy with a $46 price target. Deutsche Bank initiated coverage with a Buy and a $50 price target. Both banks recognize the high valuation but remain bullish.
Goldman analyst Heath Terry highlighted the firm’s strong and rapidly growing user base and apparently competent monetization strategy. The analyst is forecasting fiscal 2013 earnings of -$3.37 per share and fiscal 2014 earnings of -71 cents per share. Goldman’s estimates are consistent with previous estimates calling for positive earnings by 2015.
There are plenty of traders who are taking a bearish position on Twitter, though. According to Harper, there were 17.8 million shares, or 22 percent of the available float, short as of the end of November. Harper believes that this short interest “is creating a significant leveraging effect on the market value of the company. Public market investors are as a whole only able to access 11 percent, or 80 million shares.”