Twitter (TWTR) has been just awful this year, but some Wall Street folks think better times are ahead for Twitter stock.
TWTR has lost 33% so far in 2014, due in part to a sector-wide selloff in technology stocks. Additionally, Twitter stock took a beating when the lockup period for employees and early investors expired. Free to sell their shares, that’s exactly what they did, further weighing on TWTR.
But Twitter has plenty of other longer-term concerns to be worried about.
One of the biggest issues: TWTR is having trouble growing. True, TWTR stock beat Wall Street’s quarterly projection on revenues and profits — but its user growth missed the mark. That was great cause for alarm, as the market sees it.
Worse: User growth was already slowing down. A few years ago, the TWTR user base doubled quarter after quarter. In the most recent period, however, TWTR growth increased a mere 25%, down from 30% in the prior quarter.
Revenue exceeded analysts’ average estimate, as did earnings. Twitter still isn’t profitable, mind you. The company lost $133 million in the most recent quarter, or 23 cents a share. On an adjusted basis, it broke even.
One huge drag on Twitter stock is the dawning realization that TWTR might be more of a niche product than previously thought. Yes, TWTR is extremely popular with a certain type of core user, but it’s having great difficulty attracting a more mainstream, mass audience.
That makes it harder to argue that Twitter — or at least Twitter stock — is the next Facebook (FB).
3 Wall Street Upgrades for Twitter Stock
At least the selloff in Twitter stock has generated some better news lately. The price and valuation have gotten so low that a number of Wall Street analysts have upgraded Twitter stock.
Most recently, analysts at SunTrust upgraded TWTR to “buy” from “neutral,” saying it’s possible that Twitter could monetize assets to make up for the slowdown in growth.
SunTrust analysts also raised their price target on Twitter stock to $45 by the end of 2014. The valuation is likewise compelling, SunTrust says, as TWTR is now trading at a discount to the industry.
The SunTrust upgrade marks the third such major thumbs up on Twitter stock in as many trading days. Last week, Bank of America (BAC) raised its rating on Twitter stock to “neutral” (or “hold,” essentially) from “underperform” (i.e. sell). The analysts are bullish on Twitter’s ability to accelerate growth among active users.
Analysts at Morgan Stanley (MS) followed suit with their own upgrade, raising Twitter stock to “Equal Weight” (hold) from “Underweight” (sell).
However, the average rating on Twitter stock is “hold,” according to a poll by Thomson Reuters. Indeed, of the 31 analysts covering TWTR, only eight rate it a “buy.” Another nine call Twitter stock a “sell.”
With tech stocks still in tailspin, it’s hard to see how Twitter stock can buck that trend. The valuation might be more attractive at current levels, but it’s unclear whether valuation alone will be enough to motivate buyers.
After all, the most important thing the market is looking at is user growth … and until that picks up, TWTR has a cloud over it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.