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TWTR Stock – Despite Twitter Ad Mojo, Analysts Are Skeptical

Twitter's valuation has really hit crazy levels


Twitter (TWTR) was a mess just a few years ago as the company had troubles building a viable ad business. But with the efforts of Twitter CEO Dick Costolo, the situation has vastly improved.

TWTR stock price twitterOf course, the highly successful IPO is a sure sign of his success, as seen with the soaring TWTR stock price since it went public.

To give a sense of things, check out a recent report from Ad Age and RBC Capital Markets, which included an extensive survey of 953 social media marketing executives. As should be no surprise, about 70% use TWTR to put together marketing campaigns (such as by drafting tweets, including videos and photos, and so on).

However, only 46% of the respondents say that actually shelled out cash for an ad on the TWTR platform.

The irony is that this Twitter challenge is similar to what Facebook (FB) faced a couple years ago…. but Facebook had no problems creating a multibillion-dollar ad business. And it seems Wall Street thinks the same for Twitter stock.

TWTR Stock as a Mobile Play

If anything, the impact may be even more significant for TWTR stock. Keep in mind the service has been mobile-first since its inception; Mobile ads are still in the experimental stage, which means there is much room for growth.

Besides, as smartphone have become ubiquitous, there are many more opportunities to push out ads on mobile than any other platform. In light of this, is it any wonder that Wall Street has bid up the TWTR stock price like crazy?

Twitter also has another advantage – that is, the benefit from a “second screen.” This describes how users use the social media service on their phone or tablet while watching TV.

Twitter could take a chunk of the massive ad spend in this traditional industry — which should be another long-term driver for TWTR stock price action.

Twitter Stock Downgrades

All great, right? Definitely. But investors should still be wary. As is common with momentum stocks, things can quickly get out of control, which appears to be the case with TWTR stock. Just look at some of the recent downgrades:

SunTrust Robinson Humphrey’s Robert Peck: From the launch of the IPO in November, he was an unabashed bull. But the recent run-up in TWTR stock has been too much for him and he is sticking to his $50 price target. To justify anything higher, TWTR would need to reach revenue levels of $4 billion to $6.5 billion by 2017. But this seems far-fetched. So he lowered his rating on TWTR stock from “buy” to “neutral.”

Wells Fargo Securities’ Peter Stabler: He is not as enthusiastic, with a price range on TWTR stock price of $36 to $39. He downgraded the rating from “perform” to “underperform” and is concerned that there has been a weakening in user engagement.

Note that most analysts tend to be optimistic — hey, it makes it easier for the investment firms to get corporate clients, right? So when there is a general consensus that is getting more negative, investors should be wary.

And given the hefty valuation on TWTR stock — which makes other social operators like Yelp (YELP), LinkedIn (LNKD) and Pandora (P) appear cheap by comparison — it does look warranted in this case.

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.

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