We’re opening a new bearish trade on Twitter Inc (TWTR). TWTR has had a rough couple of weeks since announcing its Q3 numbers. Revenue was better than expected, earnings were in-line with analyst estimates, but Q4 guidance wasn’t nearly rosy enough to prevent traders on Wall Street from selling. The stock dropped from support at around $47.50 to support at around $42.50.
After a few days at this level, the stock dropped to support at around $40. Unfortunately for TWTR, it closed below $40 this week and barely remains above $40 today. We expect the stock to continue falling until it reaches support at around $37.50.
TWTR is facing an uphill battle against slowing growth. This is an important distinction. TWTR is definitely still growing. The company is finding ways to monetize its existing user base. However, the rate of growth the company is both experiencing and expecting in the future is slowing down, and that’s not good for a “growth” stock.
You see, TWTR doesn’t currently have a price-to-earnings (P/E) ratio because the company has a negative earnings-per-share (EPS). The company’s trailing-twelve-month (ttm) EPS is -$1.79. However, TWTR has a forward P/E of 116. That means investors are paying 116x what they anticipate TWTR is going to make during its next fiscal year. This is an incredibly high forward P/E ratio for a company that is yet to see a positive EPS. It also means TWTR’s stock price is highly dependent on future growth expectations. If those growth expectations come down at all, TWTR’s stock price is bound to fall.
TWTR’s CEO, Dick Costolo, has been coming under fire for slowing user growth and his seeming inability to put together and retain a stable executive team that can keep a clear focus for the company. Two more senior executives have left since TWTR’s earnings announcement. With Wall Street’s renewed focus on demanding companies to “show me the money,” we expect TWTR to continue losing ground while it tries to figure out how to generate not only profits but accelerating growth.
Buy to open the TWTR January 37 Puts (TWTR150117P00037000) for a maximum price of $2.00.
John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.
New to options and need more personal guidance? Try our online options course: Strategic Investing and receive your first two weeks free by clicking here.
