Twitter Inc (NYSE:TWTR) clearly has its supporters. Despite a roughly 75% crash from its early 2014 highs, TWTR stock remains a kind of cult sensation among those who love the platform for its immediacy and connectedness.
However, after rebounding from an all-time low of $14.02, Twitter stock bulls are now at risk of losing their grip on reality.
The latest proof: Quantum Trading Strategies CIO Sean Udall claiming TWTR stock could see a market capitalization of $100 billion — roughly eight times the current value of the company, and on par with German tech giant SAP SE (ADR) (NYSE:SAP).
What a loon. Twitter stock will be valued at $100 billion when pigs fly.
TWTR Stock Bounce and Buyout Rumors
For starters, let’s acknowledge that part of the recent liftoff in TWTR stock is because of the fact it was just beaten down too far for too long, and no stocks move in a straight line.
Hell, in early 2008 even Citigroup Inc (NYSE:C) saw a dead-cat bounce of 25% or so in the middle of crashing about 99% peak to trough. Swing trading a brief rebound in a long-term downtrend is a time honored tradition among chartists and short-term investors with nerves of steel.
The $26 billion acquisition of social player LinkedIn Corp (NYSE:LNKD) by Microsoft Corporation (NASDAQ:MSFT) was another big factor, since buyout rumors have long been part of the bullish thesis for TWTR stock.
However, let’s not act like either of these trends are sustainable as part of a multi-year, 900% breakout in shares.
Separating short-term sentiment from long-term investability is an important exercise in all companies, but particularly true in Twitter given its volatile history and its current challenges in turning things around. Just a few issues standing in the way of success for TWTR stock include:
- A lack of user growth with its 310 million users up just 3% year-over-year last quarter, and a continued lack of profitability.
- A need to keep valuable U.S. users, since first-quarter details showed flat domestic user growth with most of that expansion coming from overseas. Keep in mind that rival Facebook Inc (NASDAQ:FB) makes half of its revenue from the U.S. and Canada despite only 13% of its total user base living there … so monetization depends on wealthy Western users more than overseas expansion.
- A high churn rate, with a recent report from Survey Monkey Intelligence shows that Twitter’s platform sees 25% of users quit in short order — making it far less sticky than Facebook, Facebook’s Instagram platform or privately held Snapchat.
- Hateful and harassing messages abound, posing a risk to TWTR stock as users become alienated and offended. Stumbling across profane rants and hostile comments is a serious business risk to advertisers, too, even if Twitter can convince its users to suffer through.
- Returning CEO Jack Dorsey has had a lot of fires to put out in the past several months, what with a host of executive departures and continued poor financial results, but there remains a leadership vacuum and a lack of a long-term strategy and vision beyond simply tweaking the existing platform.
If you think all that is small potatoes and TWTR stock can tack on another 10% to 20% from here, I will politely disagree but understand that Wall Street can sometimes be a slave to sentiment in the short-term … and I won’t begrudge you the success if you’re right.
However, if you think TWTR can reach a $100 billion market cap or see a 50% buyout premium like LinkedIn despite LNKD being a profitable operation with a clear enterprise/business component … well, I can’t help you.
A bet that TWTR stock can reach a megacap valuation like that is the same as a bullish bet on porcine flight goggles, in my opinion.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks mentioned here.
