Investors in Twitter (TWTR) continue to enjoy their post public offering momentum as shares traded as high as $60 on Monday. In the wake of various downgrades by research analysts, I continue to believe it is time to be cautious.
While a short position is very risky, especially with no options being introduced yet, I remain on the sidelines with a slightly bearish stance.
Twitter Gets Some Bearish Broker Attention
Analysts at multiple research firms turn bearish on the stock following recent very strong momentum which pushed shares towards highs of $60 per share on Monday.
SunTrust Is Cautious
Analysts at SunTrust downgraded Twitter to "Neutral" noting that the momentum pushed shares above the 2014 target at $50 per share. Robert Peck states that he remains positive on the long term opportunities, being still in a very nascent stage of the life cycle. Strong management and optionalities in the services going forwards are big drivers.
Recent announcements like the Tailored Audience, messaging of photos and native advertisements implementation are positive. Yet the stock has risen 40% in just two weeks, with shares trading at more than double the public offering level.
Right now Peck notes that the valuation has become stretched in the near term. The company trades at 36 times revenues based on consensus estimates and nearly 300 times EBITDA for 2013. Even at 2015 consensus estimates, the company trades at 23 times earnings and 125 times EBITDA, which is quite expensive.
Wells Fargo Is Even More Cautious
Analysts at Wells Fargo (WFC) downgraded the stock to "Underperform". Analysts attach a price target of $36 to $39 dollar per share, suggesting nearly 35% downside from current levels.
According to Peter Stabler, investors are underestimating the risks out there. There are key challenges for the company and advertisers on the platform. This includes the wide variety of consumer engagement and discounting of engagement metrics.
The complexity of the platform, high valuation and even higher investors expectations are key risks in general.
Valuation
According to Twitter's S1-Filing, the company operates with nearly $156 million in cash and equivalents and no debt. This excludes the $1.82 billion in gross proceeds from the public offering, resulting in a net cash position of around $1.8 billion at the moment.
Revenues for the first nine months of 2013 came in at $422.2 million, which is up over a 106% on the year before. Losses nearly doubled to almost $134 million in the meantime. Revenues for this year should come in around $600 million easily, as the current run rate of the business stands at $800 million in annual revenues. Losses for the year are seen at $200 million, and are only increasing in the short term.
Trading around $56 per share, the market values Twitter at $31 billion, or operating assets at more than $29 billion. This values the company at nearly 50 times revenue seen for 2013 and 36 times the current revenue run rate.
Some Historical Perspective
Shares of Twitter have only been public for little over a month now. Bankers and the firm initially set a price range of $17-$20 per share for the offering, while the final price was eventually set at $26 per share. Following the successful offering shares traded in their low-forties while share rose to highs of $60 earlier this week.
Twitter reported revenues of only $28 million in 2010, expected to increase towards $600 million this year. The company posted increasing losses in recent times, yet the proceeds from the offering gives the company more than enough financial flexibility.
Investment Thesis
Twitter's momentum following the public offering has been very strong with shares tripling from the midpoint of the preliminary offering range. While the company has been last to go public, the strong performance mimics that of other internet high-fliers such as Google (GOOG), LinkedIn (LNKD) and Facebook (FB), to a lesser extent.
Crucial in all these business models are the user base, but even more so user engagement which combines results in a huge amount of traffic which these companies aim to monetize with advertisements. In comparison to these businesses, LinkedIn has the smallest current revenue base, yet it shows the fastest growth rates at the moment.
While engagement has been difficult, given the limited size of the messages, Twitter is playing another important role. In a short time period, it is overtaking, or working together with all major news agencies to become a prominent news distributor. Given the many options or additions which could be added to the basic service, it is unknown how Twitter will evolve in the future.
For now, average revenues per user trail that of other big networking sites like Facebook or LinkedIn. Expected revenues of $600 million this year are achieved with 232 million users, resulting in revenues of $2.50 per user, per annum. In comparison, Facebook generated revenues per user of $1.72 in the third quarter, at an annual revenue rate of around $7.50 per user. The much richer content of the information, and more time being spent on the social network drive the higher advertisement rates and the gap.
In the wake of Twitter's public offering, I took a look at the company's prospects. The strong momentum in the offering combined with no insider sales created a strong offering, as shares saw a big opening day jump. The limited float, strong momentum and aligned incentives makes a short position very dangerous.
Still, there is a very long way to go for firms like Twitter, as it operates with a relatively modest user base and average revenues per user. That being said, a direct comparison between various internet-based networks is not justifiable, given that they target different areas and operate in different stages in their life cycle.
While the company remains very rich, especially on traditional and current valuation metrics, shorts could get hurt badly. It all depends on the future evolution of the platform and ecosystem. While I would not dare to buy shares at this point in time, an outright short position remains risky as well. I remain on the sidelines with a bearish stance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
