So after unleashing my article on Twitter (NYSE:TWTR) to the public, I got a lot of constructive criticism from the reader base. The most common concern was the impact the share unlock would have. Now for those of you who don't know, Twitter is allowing 9.9 million shares to be unlocked today (Saturday). On May 6, 2014 an additional 465 million shares will be unlocked. Only 70 million shares are actually available to be traded at the present moment. So the rapid increase in floating shares is a negative headwind that shareholders have to consider. Currently Twitter has 555.2 million shares outstanding.

The Twitter unlock reminds me of Facebook's (NASDAQ:FB) unlock. Facebook's valuation declined abruptly following the IPO back in 2012. The value of the stock never reached new all-time-highs until the final lock up of shares expired in the middle of 2013. Markets finally absorbed the additional supply, shortly following that, Facebook beat earnings estimates significantly in Q2, 2013. The beat on earning caused the stock to surge. Currently Facebook trades near all-time-highs, and at levels higher than the IPO price.

I'm not the type to refute the basic laws of supply and demand. But at the same time, there are other companies without any restrictions on selling stock that can sustain much larger market capitalizations (Facebook, Google, and Amazon) than Twitter.

**Quantitative method for calculating potential impact**

This methodology is perhaps a little complicated, and a little convoluted. I hope to explain in thorough enough detail throughout the course of this article as to why I arrived at the observations I have. However, I have to admit, while I'm using mathematics, my analysis is arrived at by using a combination of statistics and ceteris paribus, which means that this analysis doesn't replicate all of the market mechanisms by which a market operates. Statistics is a form of inductive reasoning, meaning that the logic doesn't always lead to the expected outcome 100% of the time. This is logical guess work in other words.

I wanted to figure out the impact of share dilution on the price of a stock. I wanted to isolate the exact impact of share dilation, so I calculated the difference between a company's earnings with share dilution, and without share dilution (from share buy-backs), then applied the P/E multiple of the year. The isolated variable was the share dilution, and I assumed that market participants would be willing to buy the stock for the same exact premium despite the difference in total share count.

I used JPMorgan Chase (NYSE:JPM) as the basis for my financial study, because the company's share buyback program was fairly consistent over a long-enough of a period of time, making results more comparable.

However, I can't isolate the impact on earnings multiple from an increase in share buy-backs, which was why I had to keep the earnings multiple constant. In other words, there's simply no way to determine how much investor sentiment changes as a result of reducing the quantity of shares, so I excluded that variable entirely and made it the constant multiplier.

So what I found were three consistent sets of observation by isolating the impact of share outstanding. First I calculated that a 55.9 million reduction in shares would result in a $0.412 boost to the value of the stock. The change in the value of the stock, and change in share outstanding is near identical. For each % increase in share outstanding, I saw a directly proportional increase in the value of the stock. The correlation coefficient is .98, which means I have successfully isolated the impact of share buy-backs into a simplified input and output format.

Data from JPMorgan Chase Annual Report

I estimate that in 2011, the share price increased by 1.32% as a result of a 1.41% reduction in the total amount of shares. The impact is little less than a 1:1 ratio across all three different years, but for the sake of simplicity I'm going to conclude that a share buyback will have a 1:1 impact on the price of the stock.

**Applying our observation to Twitter**

Assuming the P/E multiple is constant: a 1% reduction in the number of shares outstanding will result in a 1% increase in the value of a stock (plus or minus 10 basis percentage points).

So to apply this understanding to Twitter, we have to assume that for every single percentage increase in available supply, the value of the stock will decline by 1%. Sounds pretty simple, but this is where the observation becomes a little convoluted.

What shareholders are worried about is the number of shares that will be sold as a result of insiders being allowed to sell. To represent the change in holdings from insider to outsider, I'm going to assess the change in the insider holdings figure on Facebook from its first day of IPO to the present day. This should lead to a consistent observation on change in total available supply.

At the day of IPO (back in mid-2012), 50% of Facebook was owned by institutions. According to the most recent 13-F (Q4 2013) approximately 65% of Facebook is owned by institutions. Therefore over the course of a year and a half approximately 15% of stock transitioned from Facebook insiders to institutional holdings. Also, the increase in supply happened all at once based on the 5-years chart of insider sales of Facebook.

We want to assess the impact from new shares that can't be easily absorbed by additional institutional investors. Since Twitter was able to attract 44.41% of institutional ownership regardless of entry price, we can assume that institutions can maintain current price. However, I'm going to assume that 20% of insider stock will go to institutions. Therefore, I believe that the 20% increase in supply coming from employees will result in a 20 to 22% decrease in the value of the stock.

As of the close Twitter is trading at $57/share without the share unlock. Factoring in the share unlock, Twitter will trade below $44.46. The result comes by measuring the sudden increase in supply and excludes those who are unlikely to sell stock. The stock could fall even further than this, but I feel that an appropriate entry on the stock would be in the mid-40s.

**Conclusion**

As you can tell, I didn't look at a price chart and randomly pick spots where the stock may rally. I have tried to isolate the impact from excessive supply, and conclude that while the stock could trade in the dumps for a bit, the impact isn't likely to be permanent. In other words, investors will have a compelling opportunity to buy-into Twitter at an even lower price in the foreseeable future.

Also, I believe that the underlying business has a lot of future potential, which is something I have mentioned in many of my previous articles. Therefore I remain bullish on the company but bearish on the stock. I wouldn't short the stock, and I don't want to recommend shorting the name, because the volatility may be too much to handle. Rather, I think that the best strategy over the long-term is to look for a cost-averaged entry once the stock falls below $45 per share.

**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.