SunTrust Robinson Humphrey analyst Robert Peck joined the Twitter IPO fray Monday by slapping a “buy” recommendation on Twitter stock — giving the soon-to-be-tickered TWTR shares a price target of $50 within the first year.
And that recommendation falls somewhere between “useless” and “crap.”
Most analyst recommendations should be taken with a grain of salt anyway. For one, the analyst community tends to be “buy”-happy in the first place. But more importantly, many analysts seem to lag with their price targets, often waiting to change them in the proper direction after a big move -– a sick game of Wall Street skitching that’s allowed to continue in perpetuity.
But Peck’s recommendation earned some extra ire for two reasons:
- Twitter stock doesn’t even trade yet.
- Twitter stock doesn’t even have an IPO pricing range yet, let alone an actual pricing.
I can’t emphasize this last point enough — Peck has a price target on a stock without a price.
The recommendation wasn’t made wholly in a vacuum. According to the New York Daily News:
Peck based his numbers on a float of 50 million shares, raising up to $1.5 billion, taking shares on issue to around 537 million.
He then calculated his share target based on 16 times enterprise value divided by revenue or 80 times enterprise value divided by EBITDA (earnings before interest, taxes, depreciation and amortization).
But unless Peck is a highly disciplined investor who cares deeply about his value metrics and wouldn’t be swayed by a much-better-than-expected offering, his target offers zero in the way to practicality for you and me. That’s because there are too many moving parts in the real deal, let alone his analysis where projections are built upon other projections.
You need look no further than the Facebook (FB) IPO to see just how quickly even real numbers can change. Early on, Facebook set a price range of $28 to $35 for about 337 million shares. Facebook’s IPO actually priced at $38 for about 421 million shares.
The difference between the worst- and best-case scenarios across all those numbers — which were “real” at the time — came to about $6.5 billion in valuation. The pricing alone was $10 higher than even Facebook expected. But let’s say someone slapped a $50 price target on FB way before its offering. At $28 per share, that’s 78% upside. At $38, that’s only 31%.
Imagine if Twitter’s IPO had roughly the same numbers (which we can do, since we’re all just spitballing here). Peck would have to be just as comfortable assuming a roughly 80% TWTR improvement within a year as a 30% one.
I guess that’s plausible, but…
Investors would just be wise to realize how much Twitter talk right now is merely speculation, and not good advice — even when it comes from a “pro” with bold numbers attached.