Twitter May Be Expensive, But Goldman Says Buy Anyways



The required quiet period has ended, and now the banks that underwrote Twitter’s (NYSE:TWTR) initial public offering are free to share their take on the stock. Before the end of the quiet period, 16 brokers averaged a fairly neutral outlook on the stock with a $38.63 median price target, suggesting about a 7 percent downside over the next year. The opinions released on Monday mostly echo this mixed position.

Goldman Sachs (NYSE:GS), the lead underwriter on the IPO, initiated coverage of Twitter at a Buy with a $46 price target. In a note seen by Street Insider, 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.

Other banks on the bullish bandwagon include Deutsche Bank, which initiated covered with a buy and a $50 price target, despite the fact that shares are “very expensive” at a trailing price-to-sales ratio of 42.37. This compares to Facebook (NASDAQ:FB) with a trailing P/S of about 16.6.

Bank of America initiated coverage of Twitter with an Underperform rating and a $36 price target. Analysts at the bank suggested that the company’s valuation is unattractive, a view whthatich is shared by many retail investors as well as analysts at firms such as Cantor and Wunderlich.

Twitter’s valuation is largely a function of speculation. Facebook and LinkedIn (NYSE:LNKD) managed to win over Wall Street when they demonstrated that they not only had highly engaged and growing user bases but that they could effectively monetize their user bases, primarily through advertising. Twitter falls into this same bucket and by and large will have to demonstrate the same things to investors.

As of September 30, Twitter claimed 232 million monthly active users, up 39 percent on the year but only about a fifth of Facebook’s monthly active user base. Timeline views, a measure of engagement, increased about 53 percent on the year to 158.7 billion for the quarter ended September 30.

Revenue has grown enormously alongside user base and engagement metrics. Revenue for the nine months ended September 30 were up 106 percent on the year to $422.2 million. Twitter’s net loss in the same period, though, widened from $70.7 million to $133.9 million. This loss, coupled with the enormous valuation, may be what is most troubling about Twitter as an investment right now.

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