After reaching a high of $73 on the day after Christmas, Twitter (TWTR) has been feeling lots of pressure. In fact, TWTR stock has dropped to about $59 since then.
But according to Heath Terry, an analyst at Goldman Sachs (GS), this could be a prime opportunity for folks eyeing Twitter stock. In a recent research report, he affirmed his “buy” recommendation of TWTR and boosted his price target from $46 to $65.
That’s one sudden burst of optimism! So why is Goldman suddenly so bullish on shares of TWTR? Let’s take a look.
Why TWTR Stock Could Keep Climbing
Well, Terry thinks that Twitter stock will get a boost from a flurry of innovation. He noted that TWTR rolled out 23 new product enhancements in the fourth quarter — four times more than any other quarter. These cover things like improvements to direct messaging as well as new monetization efforts like Tailored Ads (although, as a user of Twitter, I really haven’t noticed much).
Based on this, Terry thinks that TWTR could have a standout year. He forecasts revenues of $1.23 billion and EBITDA of $137 million. Consider that his prior forecast was for revenues of $1.1 billion and EBITDA of $126 million. A key to all this is that Terry believes there will be a nice boost in monthly active user — definitely a promising sign for Twitter stock. For this year, his estimate is for 311.7 million, up from 292 million.
While all this sounds good, Terry may be getting overeager about TWTR. Even though innovation is critical — especially when competing against fierce rivals like Facebook (FB) and SnapChat — it can be a messy process. It’s often the case that many new features wind up being duds. Oh, and successful efforts could easily take a while to get traction. In fact, sometimes users can get overwhelmed when there is too much change.
Besides, there is lots of skeptical from Wall Street analysts. For example, Morgan Stanley (MS) analyst Scott Devitt recently downgraded Twitter stock from “equal weight” to “underweight” and has a price target of $33. Then there is Peter Stable, an analyst at Wells Fargo Securities (WFC). His price target for TWTR is $39.
Plus, even with the recent drop in TWTR, the valuation is still outsized. Keep in mind that Twitter stock trades at 58 times revenues, which compares to 20X for Facebook and 19X for LinkedIn (LNKD). In other words, TWTR stock is essentially priced for perfection.
When that happens, even a slight miss can wreak havoc. So for investors who are already sitting on nice gains, it may be good to play it safe and lock them in before the next Twitter earnings report, which is Feb. 6.
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.