Twitter Inc (NYSE:TWTR) has pulled off a nice rally, with a gain of about 42% to $51 for the year, so far. TWTR stock is even beating out other social operators like Facebook Inc (NASDAQ:FB), up about 4%, and LinkedIn Corp (NYSE:LNKD), which has gained about 7%. But, can the good times continue? Brian Pitz, an analyst at Jefferies, thinks so. Today, he initiated a “buy” recommendation on Twitter stock with a target price of $65.
The key reason: video. Keep in mind that TWTR recently shelled out over $100 million for Periscope, an app that allows users to broadcast a live stream — via TWTR — to either the world, or to select friends. The app also has a peer-feedback type of feature, wherein “Going live will instantly notify your followers who can join, comment and send you hearts in real time. The more hearts you get, the higher they flutter on the screen.”
The stream is available for 24 hours, unless the user deletes it.
Periscope is still in the early stages, having only launched within the past few days, but it is currently ranked No. 44 in the U.S. on the Apple Inc. (NASDAQ:AAPL) appstore (the app is only available on iOS). It certainly helps that TWTR has been leveraging its massive user base, especially with its extensive network of celebrities and athletes who have been testing the service.
Now, as for Jefferies’ Pitz, he believes that the online ad market in the U.S. will reach $17+ billion by 2017. TWTR should get a nice chunk of that from its integrated video offerings, as well as Periscope. It also helps that the company has taken steps to improve both advertising infrastructure and mobile tools for developers.
But, there should be some skepticism. After all, the video space is experiencing tremendous competition. The dominant player, Google Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube, has over one billion users. But, FB has also been investing heavily in video, as have various old-line Internet operators such as AOL, Inc. (NYSE:AOL) and Yahoo! Inc. (NASDAQ:YHOO). Then there is SnapChat, which continues to remain a top player in mobile video.
Besides, apps like Periscope can be faddish. Already one of its competitors, Meerkat, has suffered a big fall-off in interest. During the past few weeks, its overall ranking went from 140 to an awful 661.
Then again, is live streaming something that most people really care about? Consider that the most popular live streams on Periscope are from the insides of people’s refrigerators!
Something else: Will users be willing to pay for live streaming? True, the apps are free – but not the data plans. If you live stream constantly, there’s a good bet you’ll get a hefty bill from your mobile carrier. There is also the issue of the drain on your smartphone battery.
So, if the Periscope app loses steam, it could be a problem for TWTR stock. The valuation is already steep, with a forward price-to-earnings ratio of 62x. And, it seems that the Street has already been factoring in the future benefits of video. By comparison, other social media operators have much more sober valuations, like FB, which has a multiple of 31x. In other words, for investors looking to capitalize on the video revolution, FB looks like a better option right now.
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.