Today the underwriters of the Twitter (TWTR) IPO put out research reports. However, they were a bit mixed, leading TWTR stock down a little more than 1%.
These reports mark the end of the “quiet period,” part of the complex patchwork of federal securities laws. The quiet period begins when a company files its S-1 and lasts 25 calendar days after the shares hit the market. During this time, the company is not allowed to say anything about its deal, in order to avoid hyping things. But the company’s underwriters must also abide by the rule.
For the most part, underwriters usually issue “buy” ratings when they initiate coverage. But things weren’t entirely upbeat for TWTR.
Deutsche Bank (DB) was the most postive in its outlook. The firm’s analysts put a $50 price target on TWTR stock and believe the company is the best positioned to benefit from the mobile revolution. Goldman Sachs (GS) also put a “buy” rating on the stock, but at a lower price target of $46. Again, mobile will be a key driver and the long-term prospects look bright.
Yet the other underwriters were notably less enthusiastic. Morgan Stanley (MS) issued an “equal weight” on the shares and JP Morgan’s (JPM) rating was “neutral.” And then there was BofA Merrill Lynch (BAC), which reported an “underperform” on TWTR stock.
For all these, there was a common theme: The valuation is just too high for any more gains. After all, TWTR stock is trading at 42 times sales, which compares to 19X for LinkedIn (LNKD) and 16X for Facebook (FB). Tech giant Google (GOOG) is trading at only 6X, and Apple (AAPL) is a mere 3X.
That crazy TWTR valuation has attracted plenty of bearish sentiment. Analysts from Morningstar, Wunderlich Securities and S&P Equity Research have “sell” ratings. Then there is hedge fund manager Pedro De Noronha, who thinks that TWTR stock could plunge 80%!
True, De Noronha may be an outlier. But skepticism from the underwriters is always a warning sign. Analysts were bearish on Groupon (GRPN) after its quiet period expired … and the stock went on to plunge more than 80%.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All 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.