After modest gains today, TWTR stock was up 33% year-to-date at the time this article was written, crushing the 1% YTD returns of the S&P 500 (INDEXSP:.INX).
But before you get all aflutter about Twitter, there are a few bitter truths you might want to reconsider.
What JPMorgan Said
JPMorgan, very much playing the role of the outrageously and unjustifiably bullish sell-side analyst, reiterated its “overweight” rating on TWTR stock, sticking to its $67 per share price target (representing a 40% premium over current prices).
Before getting into why JPMorgan is so bullish on TWTR, a few words on the motivations of sell-side analysts are in order. In a 2013 study exploring the motivations of more than 360 sell-side analysts, the dark truth about how they’re incentivized came to light:
That’s right — only a quarter of analysts indicated that the “accuracy and timeliness” of their earnings forecasts were of high importance. In other words, investors have ample reason to be skeptical of analysts, who don’t care much for the accuracy or profitability of their forecasts.
Pretty strange considering that accurate and profitable insight is the only reason anyone would care what analysts have to say.
In his blindly bullish praise of TWTR stock, JPMorgan analyst Doug Anmuth cites new product rollouts like Video, Instant Timeline and others as catalysts to increase users and improve the overall site experience. A meaningful increase in the number of users, however, is highly unlikely in my view.
Twitter’s Litany of Woes
Facebook Inc (NASDAQ:FB), despite having about five times the number of users, is now growing its user base at a faster clip than TWTR. Twitter grew its user base at a pathetic 1.4% quarter-over-quarter clip in the fourth quarter of 2014. Twitter has been around for years, and people are well aware of what it is. The days of explosive user growth are long gone.
It sure doesn’t help that a large portion of Twitter’s user base is literally worthless, i.e., unable to be monetized. At last check, about 8.5% of Twitter’s monthly active users were — by the company’s own estimation — either robots or fake/spam accounts.
And as far as valuation is concerned, TWTR is one of the most comically overvalued stocks in the entire market. Social media itself is a nascent industry, and one that’s highly susceptible to, well, societal trends. Couple that uncertainty with the fact that TWTR — in the estimations of sell-side analysts — is trading at roughly 60 times projected 2016 earnings per share, and you’ve got yourself a trainwreck waiting to happen.
I’m not the only one who thinks Twitter stock has a bloated valuation. Mark Cuban recently called out TWTR stock, likening both it and FB to the pie-in-the-sky valuations tech stocks commanded in the dot-com bubble back in 2000.
But don’t worry! JPMorgan thinks that Twitter stock has room to run about 40% higher. Another sell-side analyst urging people to invest in a high-flying stock. It’s just a shame they don’t care how those investments perform.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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