Twitter was down $9.56 or 13% to $63.75 on Friday after being up $3.35 to $73.31 on Thursday to reach an all-time high. The shares are up 167% from its IPO offer price of $26, up 54% from its first day close of $44.90 and up 67% for the month of December.
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The stock is being driven by momentum investors
There are 80.5 million shares available for trading from the company’s IPO and on an average day, per Yahoo Finance!, there are just over 20 million traded. On Thursday there were 82.7 million shares traded, on Friday there were over 60 million and over the previous twelve days there were at least 13 million shares traded. With what appears to be much more demand than available stock this has led to the stocks rise and volatility.
Short interest has increased by almost 400%
As of the latest date short interest was available (Dec. 13) there were 23.7 million shares shorted or 29% of all available shares. This is up from 6.3 million shares on November 15 and 17.8 million on November 29. It looks like a short squeeze could be reasonable for some of the recent increase.
Valuation is extremely stretched
This is a recording that has been played pretty much since the end of the first day of trading and when it was downgraded by two analysts on December 16 and another on Friday. With Twitter’s shares at $63.75 it has a market cap of almost $45 billion when all the vested stock options and RSUs are included (697.7 million by my calculation and will increase as more options and RSUs vest). I have a Google Doc which calculates the number of potential shares available via this link.
This would place it in 16th place on NASDAQ.com’s listing of tech companies by market cap above Yahoo! and below Texas Instruments. Texas Instrument’s 2012 revenue was $12.8 billion with net income of $1.8 billion, which compares to Twitter’s estimated 2014 revenue of $1.13 billion and a loss of under $100 million. Yes Twitter has much higher growth potential but it will need multiple years to reach any valuation metrics that support a $45 billion market cap.
When comparing Twitter to Facebook and LinkedIn Twitter has a 39x market cap to 2014 revenue and between 22x and 30x on 2015 revenue. Facebook and LinkedIn’s metrics are 13x and 11x on 2014 revenue, respectively, and 10x and 8x on 2015 revenue. And Facebook and LinkedIn are also solidly profitable.
Lock-ups come into play on February 15
From Twitter’s 424B4 filing (essentially the S-1 with final numbers from the offering) there are 474.7 million shares or 87% of its 544.7 million that are not available to be traded. The first tranche hits on February 15 with a large portion 181 days later or May 5, 2014.
The first earnings announcement will be critical
In reality every earnings announcement is critical but Twitter’s could be more so if the shares continue to trade at such high valuations. The shares could hold up if revenue comes in a good amount higher than the $216.9 million that sell-side analysts are expecting along with guidance for at least the March 2014 quarter which has revenue flat at $216.4 million.
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