Much is being made of the hyper-valuation of Twitter (NYSE:TWTR) since it went public in November, with the company amassing a market cap of $34 billion as of December 27 without a dime of profits in its history.
That kind of epic optimism is generally reserved for the arrival gates at McCarran International Airport in Las Vegas, but rarely for newly minted IPOs.
But hey, somebody has to be a winner, and lately the U.S. stock market has produced many winners.
The Dow Jones Industrials were up 25.8 percent for 2013 going into the year's final two trading sessions, the S&P 500 was ahead 29.1 percent, the Nasdaq had a gain of 37.7 percent, and the Barron's 400 Index, which is often associated with a growth-at-a-reasonable price (GARP) investment philosophy, was ahead 39.4 percent.
That must mean stocks are bound to crater any day now, according to the few remaining stock market bears, since such heady gains MUST mean valuations are through the roof.
But that's apparently not so, if you can believe industry data cited by the Associated Press. The AP reported the hard-partying Nasdaq, willing enabler of the 2000 dot-com boom(erang), had a price-to-earnings ratio of 194:1 at the height of that Internet bubble, but today has a P/E of only about 23.5.
Twitter, which plays in the Nasdaq sand box, is relying for its greased lightning trajectory on revenue growth (+100% in its latest quarter) and something generously dubbed "adjusted EBITDA" (if you have to ask what that is, you can't afford the stock).
Twitter also has an estimated 232 million users worldwide, is now tracking user demographics and conversions for eager advertisers with laser accuracy (a recipe for success: just ask Google) and has a transcendent strategy to tie music and video tightly into the user experience.
The potential for exponential growth is clearly there. This, for a company that only a couple of years ago was best known for helping huddled masses in places like Iran plan their street demonstrations in real time.
Headed into 2013's final week, Twitter shares were up 145 percent since going public on November 6, compared to its profitable social media peers of Facebook (NASDAQ:FB), up 108 percent in 2013 and LinkedIn (NYSE:LNKD), up 88 percent.
Twitter is also trading at 31x projected 2014 revenues of $1.1 billion, compared to Facebook at 14x estimated 2014 sales and LinkedIn at less than 12x estimated 2014 sales.
Clearly, Twitter would be unlikely at this stage to quality for inclusion in the Barron's 400 Index, given that index's GARP bent. The Barron's 400, with its emphasis on fundamental growth, sports a Price/Book Ratio of 6.5, which pales wildly with Twitter's bloated 48.8.
Still, there may be no better investment asset alternative now than stocks; certainly bonds look like a bad bet. If you walk into a casino and there is only one craps table, but everybody is winning at it, perhaps - yo! - you put a bet on the pass line.
To be sure, the catalyst that will take U.S. stocks down from here, dragging Twitter and its ilk along with it, has simply not shown itself.
Every day seems to bring a new spate of healthy economic reports, building on rising earnings and the recent outperformance of core industries like homebuilding and autos. The Fed is pursuing a gradual withdrawal of its massive stimulus that so far looks more like a reduced calorie diet than a starvation regime, and it's working. The bond market is still nervous but toeing the line on rising rates. The jobless rate is inching down and even the economic wrecking crews among the political class in Washington, D.C. are acting benignly.
Failing a Black Swan or a sudden reversal of the positives above, perhaps Twitter can keep headed up, perhaps with a few bumps along the way. Companies with transformative business prospects tend to lead the way in bull markets!
Yes, the cautious investor should run screaming from the room when it comes to Twitter's current valuation, even though the stock has already made mincemeat of short-sellers.
The aggressive investor should perhaps wait for a pullback - the 2013 window dressers are all in, but the 2014 capital gains harvesters in Twitter shares do not get teed up until January - and then look for a seat at a winning table. You cannot win if you do not play and, like it or not, Twitter is probably a bellwether for where the bull market heads next.