Twitter (NYSE:TWTR) stock slid more than 7 percent in early trading on Friday after getting hit with the downgrade stick from analyst Ben Schachter at Macquarie. In a note seen by Business Insider, Schachter said that while Twitter’s business looks good in the long term, there is little to no way to justify the company’s current valuation and downgraded the stock from Market Perform to Underperform.
Twitter closed Thursday up nearly 182 percent from its initial public offering price of $26 at $73.31 per share, giving the social media platform a valuation of about $40 billion. For some context, that’s about the same valuation as big-box retailer Target (NYSE:TGT), which, unlike Twitter, actually has positive earnings.
Twitter reported a net loss for the nine months ended September 30 of $133.9 million, up from $70.7 million in the same period last year, and the trend isn’t expected to change anytime soon. Even Goldman Sachs analyst Heath Terry, who initiated coverage of Twitter with a Buy, forecast negative earnings for 2014. Goldman Sachs served as lead underwriter for Twitter’s IPO.
An enormous valuation built on a foundation of negative earnings is a red flag in the eyes of many investors. Schachter’s downgrade echoes that of Wells Fargo analyst Peter Stabler, who also recently downgraded Twitter stock from Market Perform to Underperform. Stabler cited several challenges for Twitter, ranging from issues of engagement metrics to over-inflated investor expectations.
Wunderlich Securities analyst Blake Harper recently wrote that the market appears to be ignoring traditional valuation metrics and finding any excuse to be bullish on Twitter stock. “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 said.
Matt Drudge, creator of the Drudge Report, recently — and appropriately — captured the feeling that many retail investors and analysts share about Twitter in a tweet.
TWEET STREET 2014: How does a company that has not made $1 profit now have stock value of $41 BILLION? The coming crash will be horrific…
— MATT DRUDGE (@DRUDGE) December 26, 2013