Twitter (TWTR) is up 22% so far in this holiday shortened week and up 41% since December 10th when the stock broke out to its first post-IPO high. TWTR has been the gift that keeps on giving, but the run-up seems to be reaching a crescendo.
A strong-up for Twitter in December
The apparent news helping this week's run-up was the announcement by The Walt Disney Company (DIS) that it elected Jack Dorsey, co-founder and chairman of TWTR, as an independent director. The announcement included this quote from Disney CEO and Chairman Robert Iger:
"Jack Dorsey is a talented entrepreneur who has helped create groundbreaking new businesses in the social media and commerce spaces… The perspective he brings to Disney and its Board is extremely valuable, given our strategic priorities, which include utilizing the latest technologies and platforms to reach more people and to enhance the relationship we have with our customers."
Skipping over the exciting (titillating?) implications that this move could portend some kind of closer relationship between Disney and Twitter sometime in the future, it definitely brings the Twitter (and Square - Dorsey's other tech company) brand deeper into the consciousness of mainstream investors and media circles. It is a big win for both Disney and Twitter.
However, Twitter is an expensive stock that has gotten extremely expensive. At 71 times sales, TWTR is well ahead of all the internet-related stocks I track for relative valuation purposes. Yelp.com (YELP) is the second highest at 22x sales at today's close. Given an IPO of 70 million shares at $26, TWTR has clearly left a LOT of money on the table. It will be well-advised to issue more stock to take advantage of this enviable cash-raising opportunity. Granted, in 2013, these share issues have tended to initiate fresh rallies in these kind of high-flying stocks as the market sops up the extra liquidity, but the likely coming of more stock is something to keep on the radar given 545M outstanding shares and the expiration of share lock-ups on the way.
Given the momentum in TWTR there is certainly every reason to believe the stock could continue rallying right along with the general stock market. For example, according to Schaeffer's Investment Research, of the 17 analyst ratings listed, only three are positive (all strong buys). Eleven ratings are neutral, one a sell, and two are strong sells. When TWTR provides its first earnings report as a public company, there will be an interesting moment for analysts to upgrade out of their general bearishness if enough data comes through to suggest TWTR is headed for the hyper-growth implied by its valuation. Moreover, short sellers are already swarming into TWTR shares. As of November 29th, they were only 5% of the float, but total shares short have risen rapidly: 6.3M on November 15th (just one week after the IPO), 17.8M on December 1st, and 23.7M on December 15th. The only people NOT fighting the TWTR trend are options traders. They are loading up on call options as the open interest put/call ratio has plunged from around 4 soon after options first traded to 1.45 today.
With so much negativity already fighting the trend, why talk about a crescendo? There should be plenty of reluctant buyers left to take Twitter higher.
First, notice in the chart above the tremendous surge in trading volume. The 82.7M shares traded are 18% higher than the shares TWTR issued in the IPO. This trading action implies tremendous turnover in the stock which likely includes an explosive combination of speculators happily locking in profits, frantic shorts covering positions, and frenetic buyers rushing to avoid "missing the train." Under these conditions, it is hard to imagine who is left to buy at even higher prices, at least in the short term.
Second, implied volatility is on the rise. In a strong trend, I prefer to see implied volatility drop, indicating a likely compression in the stock's "range of motion." This action would suggest a stability in the trend. I interpret TWTR's surge in implied volatility as the market's recognition that TWTR's potential range of motion is expanding. If buyers are indeed drying up, then the expanded range of motion will point notably downward as opposed to a healthy consolidative phase where the stock bounces up and down in a tight range waiting for the next catalyst.
For reference, I compare Twitter to Flowserve (FLS). FLS is a "boring" industrial stock that has achieved fresh all-time highs riding on an 11% jump from the lows of December three weeks ago.
Flowserve is a low-volatility stock with periodic bursts particularly around earnings time.
As Flowserve has rallied to new all-time highs, implied volatility has SUNK
Since launching off its post-IPO lows, Twitter implied volatility has soared to match the fresh highs in the stock
Source: Schaeffer's Investment Research
TWTR's increase in implied volatility is not sufficient to flag an imminent decline. Note that it has risen throughout much of the recent rally. I am only raising this flag when including the context of the extreme in trading volume.
This assessment of a crescendo weakens if TWTR overcomes the odds by printing fresh all-time highs again in the coming days. Such a move would suggest fresh buying power exists behind the stock and that the uptrend remains the dominant feature of the stock (as explained above, I think this is the low probability path). The bearish warnings for TWTR are not confirmed until sellers manage to close TWTR below the low of this day of extreme volume ($69.13). The downside potential from there will likely be heavily dependent on the overall mood of the market (which is very bullish right now) and the general sentiment toward all things speculative in the market.
Regardless, I will now be paying much more attention to TWTR's trading action, especially after the New Year launches. I see many fireworks on the horizon...
Stay tuned and be careful out there!