Since its IPO in early November, Twitter (TWTR) has given up some ground. Twitter stock popped on its first day of trading, but shares of TWTR are off about 12% since then.
Plus, some investors think this is only the beginning of the downfall in TWTR stock. Consider that Pedro De Noronha, who manages the Noster Capital hedge fund, believes that Twitter stock could see an 80% wipe-out.
Is this an example of someone who wants to shamelessly grab headlines … or are there be legitimate concerns for a crash-and-burn of Twitter stock? Let’s take a closer look.
Is Twitter Stock in Danger?
The tough reality for fans of TWTR stock is that new-fangled industries are known for volatility and, yes, crashes. When the dot-coms blew up in 2000, many highfliers went bust. There were also 90%+ drops in solid operators like eBay (EBAY), Amazon (AMZN) and Yahoo (YHOO). So Twitter stock is probably not immune from a wide-scale bear move either.
In fact, there have already been tumultuous moves in social stocks during the past few years. Here’s a look at two notable examples, which could be ominous for holders of Twitter stock:
- Groupon (GRPN): Remember when “daily deals” were the next big thing? Not anymore. It turned out to be a fad since users got tired of the constant spamming. The result was that GRPN stock fell from $26 in November 2011 to $2.70 a year later. Granted, it’s true that Twitter stock may not suffer something similar since the company’s service does not appear to be a fad (at least not yet!). Yet TWTR must deal with tough competition, especially in foreign markets. That pressure could certainly take a toll on shares of TWTR stock over time.
- Zynga (ZNGA): From March 2012 to November, ZNGA stock collapsed from $14.50 to $2.10. The key reason was a failure to transition to mobile. This was particularly troubling since other companies, like Facebook (FB) and LinkedIn (LNKD), have been able to make the necessary changes. Of course, this should not be a problem for TWTR stock since the company was mobile-first from its inception. That has probably been the biggest reason for the strong demand for Twitter stock.
Then again, Twitter stock could face pressure from another transition: the one from public sharing of content to private chat. Operators like WeChat, WhatsApp and Line actually have more monthly active users than Twitter.
And perhaps the biggest threat is SnapChat, which deletes messages within ten seconds after they are viewed. This is a direct assault on the concept of the desire for people to share information. In fact, SnapChat is logging over 400 million snaps per day, while Twitter gets over 500 million tweets per day. All in all, the rapid move to private sharing could be drag on the Twitter stock price over time.
On top of that, valuations in the tech space are at frothy levels … as seen with Facebook’s recent offer of $3 billion for SnapChat. The problem: The value of Twitter stock is still about a quarter of the value of FB stock and pales in comparison to other companies like Google (GOOG) and Apple (AAPL). In other words, TWTR is likely to be outbid in a fight for choice assets.
Besides, De Noronha is certainly not the only bear on TWTR stock. Analysts from Morningstar, Wunderlich Securities and S&P Equity Research have “sell” ratings. There are also a smattering of “neutral” and “hold” recommendations on Twitter stock. For the most part, the sentiment is that TWTR is a good company but the valuation is too extreme.
At the current valuation, Twitter stock is selling at a nosebleed 41 times revenues. This compares to only 16x for Facebook stock and 19x for LinkedIn stock. Heck, if you applied the the stock FB multiple to TWTR stock, the price would be 40% lower.
What’s even worse is that user growth has been declining for TWTR. Quarter-over-quarter growth was 10% in Q1 and just 6% in Q3. If this keeps up, it could mean Twitter stock will be vulnerable.
Of course, even then TWTR stock may not suffer an 80% drop. Such a move would probably require a sudden drop in the mobile market, which does not look likely (at least in the short-run). But with Twitter stock priced for seemingly undending growth, it is reasonable to expect a big pullback, which could easily be 40% or more.
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.