MorningWord 2/6/14: Flushed Down the $TWTR

by Dan February 6, 2014 9:15 am • Commentary

On the surface, TWTR’s Q4 results and forward guidance beat expectations on most financial metrics, yet the stock is down more than 20% in the pre-market as growth in monthly active users (mau) was a mere 4%, to 241 million last quarter, causing analysts to model zero domestic growth much sooner than originally thought.   The other issue in the report was user engagement, as Timeline Views declined 6% year over year and 8% from the prior quarter.

Despite the stock’s recent stability in a less than stable market in 2014, Wall Street Analysts have been far from bullish heading into last night’s print, with only 7 buy ratings, 13 holds, and 12 sells, with an average 12 month price target of $50, 20% below where it went out last night. This morning, there has already been a handful of downgrades, some to sell with price targets 20% below where it is trading in the pre-market.

Additionally, short interest has been rising rapidly, and was last recorded by Bloomberg at 40% of the float. Did the analyst community learn their lesson from the pre and post FB IPO debacle?   Possibly, but the guidance is now out of the bag, and analyst and investors are left to make non-stop comparisons to the only other real publicly traded pure play in Social Media – FB.  In a research note this morning, Bernstein analyst Carlos Kirjner made the following observation about FB’s earlier domestic user growth, and how investors may want to think about TWTR’s potential, or lack there of:

when Facebook had roughly the same size of Twitter in North America, it was adding about 13 million new MAUs a quarter (vs. Twitter’s 1 million). Here is another way to look at this: if Twitter quadruples the number of new MAUs it adds a quarter (vs. 4Q13), it would take it about 9 years to get to 200M domestic MAUs, Facebook’s current number.

After listening to last night’s Q4 conference call to suggest that the QnA section was nothing short of combative would be misleading.  It appeared that one analyst after another started their question with something like, “not to beat a dead horse”, but the takeaway was clear, the analyst community had a very hard time seeing CEO Dick Costolo’s vision for re-accelerating user growth and engagement.

TWTR’s valuation is ridiculous by any metric, but as we’ve seen so often over the past few years, many internet stocks have not traded based on traditional valuation metrics.  So the severe reaction in TWTR is a bit of an outlier, but the stock’s move lower is just the most recent example of what happens to hot story stocks with little fundamental support when the story hits a bump in the road.

Investors care about Valuation today, they didn’t yesterday, and they will likely not again at some point in the future.   Due to the scarcity of pure play publicly traded social media companies, I suspect TWTR will remain a must own for most tech and growth funds.  Investors have short memories and using sentiment in FB in the quarters following its May 2012 IPO as a guide, the TWTR story is likely far from done. But this morning, people are looking at it in a very different way than they look at Facebook.