I’ll make this easy for all of you traders out there just dying to pick a spot and step in on the long side of TWTR. I wouldn’t touch it prior to their Q4 earnings (scheduled for Feb 5th after the close) or until the stock tests $50 on the downside. Not that $50 is some sort of valuation level that makes sense. That will still be about 25x 2014 expected sales. That’s not much less egregious than the almost 30x it trades at now, but more of a short term technical and psychological level. Obviously, this is all a bit of guess work for a stock that has just 2 months of trading history under its belt, but looking at the 2 month chart below, what strikes me is the ramp up in trading volume in December, after what was a fairly low volume sell off from the IPO highs for most of November.
So in the stock’s very short history, it is like a tale of two cities, with November going sideways after the decline from the IPO pop and then Euphoria into year end.
This past week has seen 3 ratings downgrades to SELL in the stock from Morgan Stanley, Cantor and Cowen, all citing valuation. Yesterday, a Cantor analyst suggested that “Twitter is in a class of its own” on the valuation front when compared with recent internet IPOs” (courtesy of Barron’s Tech Trader):
TWTR’s 30.8x EV/Revenue multiple ~2 months post-IPO compares to ~15x for Google (GOOG), ~16.5x for LinkedIn (LNKD), ~8.5x for Facebook and ~4x for Yelp (YELP), around the same period. Even adjusted for growth, TWTR’s EV/Revenue/Growth is ~0.30x two months post-IPO vs. 0.19x for Facebook (FB), 0.14x for GOOG, 0.13x for LinkedIn, and 0.06x for Yelp.
We know how valuation shorts end, so we will avoid the short side for those reasons, but the psychological aspects about the stock and the actual social media are quite fascinating to me. While there will certainly be bumps along the way, I suspect TWTR continues to capture investor interest for years to come.
In the meantime, the stock’s bizarr0 behavior for the last three weeks banging around between $55 and $70 ish is likely the result of quickly rising short interest. The latest readings suggest short interest now at around 30% of the float.
As Enis highlighted on Dec 26th in his Chart of the Day post on TWTR, implied volatility has shot through the roof, also eclipsing levels seen by prior social media epos. While 30 day at the money implied vol, or a measure of the price of options (blue line below) sits just below 100, the 30 day realized volatility, the amount the stock is actually moving (white line below) is in the 80s, so on a relative basis, options are not that expensive.
Regardless of valuation concerns, I would argue that TWTR is a much less mature company than Facebook when it went public in May of 2012 (or GOOG for that matter in 2004). Twitter is still in search of its bread and butter revenue model, though the reach of its platform is clearly impressive, as is its user satisfaction overall. But building out a profit-machine from just a platform involves a fair share of roadblocks along the way, which likely implies volatile price action keep and fairly high options prices on the stock.
That high volatility is something that we’ll be looking to embrace rather than shun, since it will create plenty of opportunities for various options structures. For now, we’re waiting a bit for the dust to settle, and get a glimpse at the stock’s first reaction to earnings. I will be waiting for a potential test of $50, and might look for a short-term long play around there if the setup comes to fruition.