Regular readers of RiskReversal know that we are NOT the “I told you so” guys, but… One of our trades earlier in the year was buying shares of Twitter (TWTR) prior to their Q2 results in late July when the stock was below $40 as we felt at the time:
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!
At the time we felt that investor sentiment towards TWTR at $38 was still too bearish given the investment environment and what we think is a very unique situation with the company’s scarcity value, despite its inability to dramatically grow its user base and engagement.
After the stock’s sharp 40% rally in a matter of months we exited the postion in Sept and Oct stating the following on Oct 9th:
At this point it is my sense that the risks to the story are more accurately priced in given the stock’s nearly 90% gains from the May lows. Still very much in favor of the longer term prospects.
So my trade had little to do with financial metrics and a whole heck of a lot of sentiment. So this morning, with the stock down 12% on results and guidance that the street was less than happy with, the question is what to do? Well, in yesterday’s preview we identified the importance of the $50 level. That was the high from its IPO day, breakdown level early this year and consolidation range of the last two months:
With the stock attempting to fill in the Q2 earnings gap from July, I am not sure you have to jump in right here expecting a massive bounce. I have been fairly vocal about my intent to re-establish a long position on a move back to the mid $40s, and frankly I thought if we saw those levels in the near future it would be a function of broad market selling. Today’s decline is obviously stock specific, and I think it is the sort of sentiment shift that prospective buyers want to give a little time, and see the stock stabilize before jumping in.
But this really depends on time horizon. If you believe as I do that TWTR would could solve some of their user and engagement issues being a social engine for a much larger audience with hundreds of millions more active users like Google (GOOGL), then your entry at $42 or $39 is not going to matter much. If you think the selling is overdone and that the stock could easily fill in a part of today’s gap as you view it as an overreaction, then it could be a great spot for a quick trade. I don’t have an opinion on the latter situation. However, what I would love to see is the sentiment once again shift to overly pessimistic, and have an opportunity to buy when the stock is once again completely unloved.