Well, folks. So much for that brief stock market correction.
Twitter (TWTR) stock tacked on as much as 4.7% in early trading on Monday after an aggressive upgrade from SunTrust analyst Robert Peck, who gave the stock a “buy” rating and a $38 price target. Given its closing price of $26.83 on Friday, SunTrust believes there’s a whopping 42% upside in Twitter shares at these levels.
Peck, it would seem, doesn’t know that Twitter is for the birds.
TWTR: The Pros
The reasons Peck cites in his bullish note on TWTR stock, published in part on Business Insider earlier today, read like the teleprompter of an overly cautious meteorologist, eager to emphasize just how wrong he could be.
Exhibit A: The largest bullet point reads, “But Sentiment Is At An All-Time Low And Many Catalysts Are Coming.”
Oh, great! People hate the stock! I’m calling my broker! Wonder if he hates Apple (AAPL), too? OK, so what are these cold, hard catalysts set to send TWTR stock to the moon?
Well,
- A new chief executive “Could Be Announced By Labor Day.”
- Don’t worry about that sluggish user growth! “New Products And Deals Could Reignite Monthly User And Engagement Growth.”
- What about revenue? Targeting and partnerships “Could Reignite Monetization.”
- The board of directors “May Change By Year’s End.”
- TWTR’s trajectory? Don’t sweat it: “Near-Term Trends Appear To Have Stabilized.”
On a more substantive note, there certainly are some positive developments with TWTR, notably its growing partnership with Google (GOOG, GOOGL), which is now displaying tweets in organic search results on both desktop and mobile.
Presumably its live-streaming video acquisition, Periscope, could, maybe, possibly, also ignite user growth and engagement.
TWTR: The Cons Are Worse
Perhaps the most ominous sign for TWTR stock is that none of its pros are convincing in the least. It’s a darn hard stock to value to begin with, so when Peck mentioned that an “attractive valuation” plays a role in his upgrade, my eyebrows almost jumped off my face.
Currently, TWTR stock trades at 43 times 2016 estimates for non-GAAP earnings, a measurement of profitability Silicon Valley loves to use that excludes the costs of things like stock-based compensation expenses and depreciation of acquired intangible assets.
To give you an idea of just how dramatically GAAP vs. non-GAAP profitability can be with TWTR, the company actually lost $577.8 million in 2014. But after it backed out $631 million in stock-based compensation and other charges? Voila! Twitter was $100 million in the green.
Even trying to value TWTR on the basis of users makes the stock look absurdly expensive.
InvestorPlace.com Editor Jeff Reeves pointed out in a recent MarketWatch column that if Facebook (FB) were to buy Twitter today for the same per-user valuation it paid for Instagram in 2012, TWTR would be 40% overvalued. Similarly, when Facebook bought messaging service WhatsApp for $19 billion in 2014, Zuck and Co. paid about 25% less on a per-user basis than Wall Street’s paying for Twitter stock right now.
Hardly sounds like a steal to me. But hey, the stock’s up about 6% today, so who am I to judge?
I will say one thing, though: A true, return-to-fundamentals correction would’ve sent this stock into the gutter already, so trade carefully.
As of this writing, John Divine was long AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
