BY SUPANTHA MUKHERJEE AND SAQIB IQBAL AHMED
– Twitter Inc investors who heeded the advice of high-profile banks such as Goldman Sachs Group Inc and Deutsche Bank AG to buy the social media company’s shares might be kicking themselves.
Much more accurate calls were made by Wells Fargo, Atlantic Equities and Macquarie Research, whose analysts advised clients to get out of the high-flying stock about the time it peaked in December.
On Wednesday the stock fell as low as $37.24, 50 percent below its peak of $74.73 the day after Christmas, wiping almost $18 billion off Twitter’s market capitalization.
The downgrades, and the subsequent swoon by the stock, reflect concern about slowing growth in Twitter’s user base and the company’s ability to reverse the trend. Year-on-year growth in the number of Twitter users has fallen for five straight quarters, and the company said on Tuesday that its 255 million monthly users, on average, appeared to check the service less frequently than a year ago.
That in turn has fueled doubts that Twitter could one day attract as many users as Facebook Inc’s 1.2 billion, or match its much larger rival’s power as an advertising vehicle. It’s also raised questions over whether it can sustain growth over the long term. While no one is suggesting Twitter will lose its consumer cachet as happened to companies such as MySpace or Orkut, neither can anyone guarantee that as tastes change newer rivals won’t usurp it.
“Can they become a mainstream company? That’s the open question,” said Ben Schachter, the Macquarie Securities analyst who downgraded Twitter’s stock to “underperform” on December 27 – the day after it peaked.
It’s a far cry from the enthusiasm that greeted the company when it debuted on the New York Stock Exchange on November 7 and its shares soared 73 percent over the offering price. There was no let-up for the next two months, as the stock scaled fresh highs with little or no news to justify the valuation.
That got some analysts worried. Schachter, speaking to Reuters on Thursday, recalls a “runaway momentum.”
Starting mid-December, seven brokerages downgraded the stock within a span of three weeks. Wells Fargo and SunTrust Robinson kicked off the first round of downgrades on December 16, followed by Atlantic Equities. Macquarie timed its downgrade to perfection.
In his downgrade note on December 16, Wells Fargo analyst Peter Stabler said investors were “underestimating the challenges facing the company”.
A common theme was that Twitter, though innovative, well-run and full of potential, simply did not warrant such a rich valuation, so soon.
“They are focusing on the right things. I only have positive things to say about the company. My quibble is with the stock,” said Brian Wieser, Pivotal Research Group analyst, who was among the first to urge clients to retreat.
He downgraded the stock to “sell” immediately after Twitter’s shares jumped on its opening day. At the time, he had a $30 target price on the stock and recommended selling after they breached the $45 level in their market debut.
THE RISKS
Twitter said in 2010 that it aims one day to have 1 billion users. It did not specify a time frame.
Some of the analysts who downgraded the stock in December are not as confident in Twitter’s long-term outlook, much of which will hinge on the company’s ability to increase both the number of users and how much time they spend on the site.
A fast-growing and engaged user base would help Twitter rake in more advertiser dollars; however, those are issues over which management has limited control, Atlantic Equities analyst James Cordwell said in December.
Investor worries were reflected in the response to Twitter’s quarterly results this week, when the market overlooked higher-than-expected revenue to focus instead on the slow user and usage growth. Twitter’s shares fell 10 percent.
The expiration on May 5 of Twitter’s six-month “lockup” – the period after the initial public offering during which early investors are barred from selling their shares – could put the stock under more pressure. Restrictions on about 470 million shares will be removed.
Twitter’s co-founders, Jack Dorsey and Evan Williams, and Chief Executive Richard Costolo have said they do not plan to sell their shares after the post-IPO restrictions are lifted.
