Twitter Finally Gets Caught By the Bad News Bears Brigade

Matt Drudge, creator of the Drudge Report, may have articulated it a bit dramatically, but in spirit, he was right. Echoing the sentiment of many retail investors and analysts alike, Druge cited Twitter’s (NYSE:TWTR) negative earnings and enormous valuation as a recipe for disaster — and, as of December 30, the market was cooking it up.

Twitter stock fell 13 percent on Friday, closing the day at $63.75, and opened Monday at $60.27, down about 5 percent. Shares stayed trapped below $61 on Monday afternoon at the time of writing, and the market appears content to let the stock wallow through its first major correction since Twitter went public at the beginning of November.

Twitter stock has been surrounded by red flags since its initial public offering. In its S-1 prospectus — a document the company filed with the U.S. Securities and Exchange Commission detailing its business ahead of the IPO — Twitter reported a net loss of $133.9 million for the nine months ended September 30, up from $70.7 million in the year-ago period. Although revenue is growing rapidly, climbing 106 percent for the nine months ended September 30 to $422.2 million, earnings are expected to remain negative through 2014. Even Goldman Sachs analyst Heath Terry, who gave Twitter stock a Buy rating with a $46 price target, forecast negative earnings of 71 cents per share in 2014.

“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,” Wunderlich Securities analyst Blake Harper wrote earlier in the month. Harper reiterated a Sell rating on Twitter stock.

But despite the fundamentals, whether the stock price will deflate in the coming weeks and months and bring the company down to a more reasonable valuation is unclear. There is apparently an enormous amount of bullish sentiment surrounding Twitter: Investors seem unable to get the stars out of their eyes. With a trailing price-to-sales ratio of about 65, investors either have a lot of faith in the long thesis or confidence that they will be able to find the greater fool at some even higher valuation in the near future.

Twitter stock is still up more than 50 percent since its first day of trading, and is up nearly 135 percent from its IPO price of $26 per share.

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