TWTR: 4 Reasons the Twitter Stock Horror Show Will Continue

The severe drop in TWTR hasn't knocked off all its froth, and it's still being dogged by several key issues

   

Twitter (TWTR) has become a sobering example of the inherent risks of buying into a fresh IPO.

Twitter 300x300 TWTR: 4 Reasons the Twitter Stock Horror Show Will ContinueAnyone in Twitter at the onset was fine, sure. Twitter stock priced at $26 in November before shooting up to as high as $74 near the end of the year.

But right before 2014 got rolling, Twitter stock began a rocky decline that currently has TWTR shares off 45% from their peak.

And worse — the damage probably isn’t over yet, either. Here are four things that could put continued pressure on Twitter stock in the weeks and even months ahead:

TWTR Headwind #1: User Growth

Twitter’s first earnings report as a public company proved that TWTR knows how to monetize its user base. Revenues spiked 116% year-over-year to $243 million, and the company managed to turn a profit of 2 cents per share where analysts were forecasting a 2-cent loss.

And yet, TWTR stock still got slammed.

That’s because user growth was found wanting. Twitter added a mere 9 million monthly active users in Q4, 1 million of which came from the U.S. That’s a meager 3.8% improvement over the third quarter, in which TWTR posted still-unimpressive 6.4% user growth sequentially.

The performance was alarming, as many people thought the buzz from Twitter’s IPO would also gin up excitement in the company’s actual services. Apparently, that guess was wrong.

TWTR has been trying to improve the situation. For instance, it has included Twitter Alerts, added the capability to send/receive photos via direct message, and debuted a redesign of the page that actually looks more like Facebook (FB). These measures might help, but they don’t scream of innovation — and it’s likely that will result in continued stagnation in user growth. In turn, that could lead to more erosion in Twitter stock.

But Twitter has engagement issues as well. According to a recent study from Twopcharts, roughly 44% of users have never sent a tweet! That indicates a severe problem with lack of interest and the possibility of very high churn.

Perhaps to make up for the shortfall, TWTR is ramping up its advertising efforts. Based on a report from the Wall Street Journal, the company will launch 15 new ad products during the next six months.

This actually contrasts well with Facebook (FB), which typically takes a long time to monetize an asset (see: Instagram and WhatsApp).

Then again, Facebook has not suffered from any user growth problems, so it has the luxury of being patient. Plus, it also lessens the risk of alienating existing users.

TWTR Headwind #2: Lockup

An IPO lockup period prevents employees and venture capitalists from selling their shares for a certain period after a public offering. In the case of Twitter stock, it has a “staged” lockup expiration structure.

The first stage came on Feb. 15, and at 9.9 million shares, it was fairly modest. However, a much larger one comes on May 6 that will involve a staggering 465 million shares. (Consider that the company originally issued 70 million shares).

In other words, don’t be surprised that Wall Street has been getting antsy about this lock-up period and selling off in advance. And even though a ton of froth has come off TWTR, the selling pressure in Twitter stock still could be enormous once the lockup expires, as many employees might fear losing even more of their gains.

TWTR Headwind #3: Breakdown of the Momentum Stocks

Biotechs and Internet/social stocks have been on a massive bull run for more than a year … until recently. But now, markets are rotating away from these momentum plays and into larger-cap stocks.

A clear sign of this is the sudden problems in the IPO market, which is a hot spot for momentum companies. For the year so far, about 56% of IPOs have dropped in the aftermarket, according to a report from Renaissance Capital.

Rotations are rarely short-term events, and valuations can become exaggerated on the downside.

TWTR Headwind #4 :Valuation

It’s hard to lose half your value and still be frothy, but that’s exactly what Twitter stock is. TWTR currently sells at 35 times sales, which is high period, but even high compared to its loftily valued peers.

Company Ticker Price-to-Sales
Facebook FB 19
Yelp YELP 19
Zillow Z 19
LinkedIn LNKD 13
Pandora P 8
Groupon GRPN 2

Even if TWTR were to revert to the high end of this group (19 times sales), Twitter stock would be trading at $22 — another 45% lower from here.

Bottom Line

Twitter stock is surrounded by some scary numbers — too many of them, in fact, to be ignored. Buying TWTR on the dip might seem like a tempting proposition right now, but you might find even better prices if you exercise some patience.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/ipo-playbook/twitter-stock-twtr-horror/.

©2014 InvestorPlace Media, LLC

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