MorningWord 8/12/14: $TWTR’s Mute Function

by Dan August 12, 2014 9:11 am • Commentary

What’s up with Twitter?  What happened to that pre-market stint above $50 following the better than expected Q2 report in late July?  The results on most metrics served as a relief to many who have been sitting tight on shares from the IPO. And those same people are probably the ones that feared another bloodletting like the stock’s massive decline on its disappointing Q1 in early May and the lock up expiration that plunged the stock from about $40 to $3o in a matter of days.

TWTR from IPO courtesy of Bloomberg
TWTR from IPO courtesy of Bloomberg

Let’s review the the two big moves in TWTR this year. On May 5th, 500 million shares came eligible to be sold from insiders and early investors, this following the company’s IPO 6 month earlier where they sold 70 million shares at $26 each. There were no shortage of sellers despite the fact that many high ranking insiders and some very large investors had stated previously in April that they “have no current plans to sell any of their shares of Twitter common stock“.  Well that was April.

More recently, the stock’s price action in the 8 days since the 20% gap higher on Q2 earnings clearly suggests selling… steady, careful selling:

TWTR 10 day chart from Bloomberg
TWTR 10 day chart from Bloomberg

So it shouldn’t come as a huge surprise that shares from some large holders are now hitting the market. Per Re/Code yesterday:

Benchmark is spreading the wealth following Twitter’s recent financial success on Wall Street.

The Silicon Valley venture capital firm returned roughly 5.3 million shares of Twitter stock to its limited partners on Friday, according to documents filed with the Securities and Exchange Commission on Monday. Twitter’s stock price closed at $43.13 on Friday, meaning Benchmark distributed more than $228 million back to its own investors.

The distribution doesn’t mean Benchmark sold its shares in Twitter — it just passed the ownership along to other investors. It also didn’t deplete much of Benchmark’s stake in the company; the firm, which first invested in Twitter back in 2009, still owns more than 26 million shares of Twitter stock.

Is this an important distinction that TWTR’s 5th largest shareholder hasn’t itself hit the Sell Button, or that they have placed the decision in their investors hands??  Not really. But it is safe to assume that Benchmark did their duty by not adding more fuel to the lockup fire leading up to the May 5th expiration and now will look to monetize, or at least give their investors the ability to monetize some of their profits that have until now been only on paper.

Prior to the Q2 print, I bought TWTR stock. From July 29th:

Twitter is a very unique web property, and its current $23 billion market cap does NOT reflect its scarcity value. What do I mean by this? Well, the $19 billion price tag Facebook paid for WhatsApp is exhibit A, most large internet companies have a some obvious holes when it comes to social media, like Google, MSFT & Yahoo. What Twitter is really good at is real time search, and Google who is the king of web search has a realtime search problem, not to mention a fairly horrible social media offering in Google Plus. Before this bull market is over I suspect we will see a bidding war for Twitter due to its scarcity value and social relevance, NOT for what they have or have not been able to demonstrate as it relates to ad revenues, user growth or engagement, but for the potential!

So why hasn’t the stock doubled like Facebook did after they finally demonstrated to Wall Street that they were able to monetize the shift of users to mobile phones? In contrast to Facebook, TWTR has never sniffed its IPO price since going public. This is despite the fact that Facebook had not only immediately traded below its IPO price, but spent quarters below it, as most thought that not only was the business model broken but the IPO was rigged. Investors (and bankers) have had the benefit of hindsight with their Facebook experience and have been much more cautious in TWTR.  Despite the perceived improvement in some key engagement and user growth estimates, the social network is well behind that of Facebook in terms of scale, and it is my sense that many growth investors are going to stick to proven growth no matter what the valuation.

But I sure as heck know this – at this stage of the investment cycle, I would much rather take a flier on TWTR than Facebook.  Both are trading at a forward expected sales multiple of about 11.5x in 2015.  However, the simple fact that Facebook’s market cap is $190 billion seems LUDICROUS to me, while in comparison, TWTR’s $27 billion market cap still offers tremendous potential due to the scarcity value of social media properties with established footprints. I will be adding to my long in the low $40s and be looking for options trades to isolate the company’s Q3 report expected in late October or early November that can add some leverage to this view.