Twitter stock slumps by 50%

Analyst said market sentiment would eventually shift away from users toward revenue growth.

FILE: Analyst said market sentiment would eventually shift away from users toward revenue growth. Picture: CNN.

REUTERS - Twitter Inc. investors who heeded the advice of high-profile banks such as Goldman Sachs Group Inc. and Deutsche Bank AG to buy the social media company's shares might be kicking themselves.

Much more accurate calls were made by Wells Fargo, Atlantic Equities and Macquarie Research, whose analysts advised clients to get out of the high-flying stock about the time it peaked in December.

On Wednesday the stock fell as low as $37.24, 50 percent below its peak of $74.73 the day after Christmas, wiping almost $18 billion off Twitter's market capitalization.

The downgrades, and the subsequent swoon by the stock, reflect concern about slowing growth in Twitter's user base and the company's ability to reverse the trend. Year-on-year growth in the number of Twitter users has fallen for five straight quarters, and the company said on Tuesday that its 255 million monthly users, on average, appeared to check the service less frequently than a year ago.

That in turn has fueled doubts that Twitter could one day attract as many users as Facebook Inc.'s 1.2 billion, or match its much larger rival's power as an advertising vehicle. It's also raised questions over whether it can sustain growth over the long term.

While no one is suggesting Twitter will lose its consumer cachet as happened to companies such as MySpace or Orkut, neither can anyone guarantee that as tastes change newer rivals won't usurp it.

"Can they become a mainstream company? That's the open question," said Ben Schachter, the Macquarie Securities analyst who downgraded Twitter's stock to "underperform" on 27 December - the day after it peaked.

It's a far cry from the enthusiasm that greeted the company when it debuted on the New York Stock Exchange on 7 November and its shares soared 73 percent over the offering price. There was no let-up for the next two months, as the stock scaled fresh highs with little or no news to justify the valuation.

That got some analysts worried. Schachter, speaking to Reuters on Thursday, recalls a "runaway momentum."

Starting mid-December, seven brokerages downgraded the stock within a span of three weeks. Wells Fargo and SunTrust Robinson kicked off the first round of downgrades on 16 December, followed by Atlantic Equities. Macquarie timed its downgrade to perfection.

In his downgrade note on 16 December, Wells Fargo analyst Peter Stabler said investors were "underestimating the challenges facing the company".

He downgraded the stock to "sell" immediately after Twitter's shares jumped on its opening day.


Twitter said in 2010 that it aims one day to have 1 billion users. It did not specify a time frame.

A fast-growing and engaged user base would help Twitter rake in more advertiser dollars; however, those are issues over which management has limited control, Atlantic Equities analyst James Cordwell said in December.

Investor worries were reflected in the response to Twitter's quarterly results this week, when the market overlooked higher-than-expected revenue to focus instead on the slow user and usage growth. Twitter's shares fell 10 percent.

The expiration on 5 May of Twitter's six-month "lockup" - the period after the initial public offering during which early investors are barred from selling their shares - could put the stock under more pressure. Restrictions on about 470 million shares will be removed.

Twitter's co-founders, Jack Dorsey and Evan Williams, and Chief Executive Richard Costolo have said they do not plan to sell their shares after the post-IPO restrictions are lifted.

Only one other major investor, Benchmark Capital Management Co LLC, which owns 31.6 million shares, has publicly stated that it will not sell the stock when the lock-up expires.


Still, Goldman and Deutsche Bank, both underwriters of the high-profile IPO, maintain their positive views of the stock, in spite of the user trends, two consecutive quarters of disappointing results and the decline in its shares.

Twitter shares trade at 334.2 times forward earnings, far more than Facebook's 38.1 times, according to StarMine, or the average of 17.95 for the Standard & Poor's 500 Index, according to Thomson Reuters data.

Sandler said market sentiment would eventually shift away from users toward revenue growth. Facebook, he argued, also struggled with slow user growth last year before regaining Wall Street's favor thanks to its strong mobile ad business.