Twitter’s Stock Swings Driven by Biggest Split in Ratings

To understand the volatility in Twitter Inc. (TWTR)’s stock since its November initial public offering, consider the opposing views of Ken Sena and Daniel Ernst.

Sena, an analyst at Evercore Partners Inc., calculates Twitter’s stock can reach $70 in the next 12 months, while Ernst, an analyst at Hudson Square Research, thinks it’ll drop to $20. The spread between those predictions -- which represent the highest and lowest price targets for Twitter -- is the widest among technology companies in the Russell 1000 Index with a market capitalization of more than $10 billion, according to data compiled by Bloomberg.

The division is reflected across the analyst community -- even among the firms that managed Twitter’s IPO such as Goldman Sachs (GS) Group Inc. and Morgan Stanley -- spurring large swings in trading. After Twitter extended its post-IPO rally to more than 180 percent last month, bearish ratings have now climbed to outnumber positive ones by more than any other technology company, data compiled by Bloomberg show. Meanwhile, investors are still willing to value Twitter at a price-to-sales multiple more than double that of Facebook Inc. (FB)

“People are saying they’ll grow into it, but the valuation multiples are presuming a growth rate far above any company that’s ever existed,” Ernst said. “Twitter’s opportunity is less than infinite. And today’s valuation gives it almost infinite opportunity.”

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Photographer: Scott Eells/Bloomberg

A man takes a photo of an @twitter banner displayed on the exterior of the New York Stock Exchange (NYSE) in New York.

No Handle

There are now at least 11 brokerages that advise selling Twitter shares, compared with six firms that rate it the equivalent of a buy. Driving the breadth of ratings is the difficulty of getting a handle on Twitter’s prospects. The San Francisco-based company, which lets users post 140-character updates to their followers, generates revenue through advertising. It is deeply unprofitable as it spends to boost its consumer base and broaden its international presence, yet user growth is slowing and it faces plenty of competition.

Some analysts who recommended purchasing the stock after Twitter’s IPO changed their minds after the shares soared from their $26 IPO price, giving the unprofitable microblogging service a higher valuation than peers that make money. Others anticipate Twitter will be highly successful, even before the company’s Feb. 5 earnings, its first since the IPO.

Underwriters Split

Even the firms that managed Twitter’s IPO are split. Goldman Sachs yesterday raised its price target on the company to $65 from $46, citing an accelerated rollout of products that help advertisers reach users. Yet Morgan Stanley put a sell rating on Twitter last week, saying the company’s success was “far from guaranteed” as Google Inc.’s YouTube and Facebook are more dominant and provide more return for advertisers.

Jim Prosser, a spokesman for Twitter, declined to comment. Scott Devitt, an analyst at Morgan Stanley, and Heath Terry, an analyst at Goldman Sachs, didn’t immediately return requests for comment.

Twitter rose 1.4 percent to close at $57.82 in New York yesterday, after a 17 percent plunge last week amid a slew of analyst downgrades.

Twitter is projected to almost double sales to $217 million in the fourth quarter, while recording an operating loss of $17.4 million excluding some items, according to the average estimate of analysts surveyed by Bloomberg. Twitter has about 230 million users, or one-fifth that of Facebook’s more than 1 billion, and it isn’t anticipated to be profitable until 2015.

Those financials are coupled with an already rich valuation. Twitter is trading at 28.9 times projected 2014 sales, compared with 14.2 times for Facebook, and 12.1 times for LinkedIn Corp. (LNKD), according to estimates compiled by Bloomberg.

No Benchmark

Analysts and investors also have few examples to benchmark Twitter against in determining how valuable the company’s advertising products will be in the future. Twitter pitches itself as the destination for information on current events as they happen. Analysts are debating whether that’s a function that will make Twitter more or less valuable and profitable than Facebook down the road.

“You have a situation where it’s difficult to justify the valuation on traditional metrics and analysts are having to be more creative,” said Ryan Jacob, chief investment officer of Jacob Asset Management LLC, which doesn’t own Twitter shares. “Because it’s somewhat unmoored from the financial performance at this point, you can be much more creative in coming up with justifications for price targets. It’s captured the imagination of investors.”

Twitter Products

Twitter has said that by advertising on its platform, brands can capitalize on current events, including live television. The company has touted its engagement with mobile users, where it derives more than 70 percent of advertising revenue -- a higher proportion than Facebook. It plans to use money raised in the IPO to build its business outside the U.S., where it got 77 percent of users and only 26 percent of revenue in the third quarter.

Since its IPO, Twitter has been updating its products to better engage people, making images appear more prominently on the site, among other moves. The company yesterday tweaked the design of its desktop site to look more like its mobile applications for Apple Inc.’s iOS operating system and Google’s Android.

“When you have a young stock like this, it trades on a vision of better advertising and higher earnings power, and in particular, we don’t have any earnings yet,” said Brian Nowak, an analyst at Susquehanna Financial Group. “There’s just a lot of uncertainty around what they’re actually going to report.”

Guessing Games

The fluctuations in the stock have led to debates. Jeff Sica, president and chief investment officer at Sica Wealth Management, had predicted the company would reach a $40 billion valuation shortly after starting to trade. At the time of its IPO, Twitter had priced itself at $14.2 billion.

“Everyone thought I was crazy, throwing that number out there,” Sica said. “But when you look at where Facebook is, it’s justifiable.”

Still, until there are more numbers to track, “it’s just going to continue to be a fantasy stock,” Sica said.

Sena and Ernst, the two analysts with the most extreme price targets, remain on opposite sides. Sena on Jan. 2 raised his price goal for Twitter to $70 from $52, citing the company’s ability to become “a leading place for short-form video content viewing and discovery with the potential for greater long-form viewing down the road.”

“Who has a target price of $20?” Sena said in an e-mail.

For Ernst, $70 is unreasonable given that “Twitter one day will trade at a multiple in line with its peers.” To presume the stock is worth $70 or $65 “embeds an unrealistic set of assumptions and views about risk,” he said.

To contact the reporter on this story: Sarah Frier in San Francisco at sfrier1@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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