The stock market has been in crazed overreaction mode over a potential sale of Twitter. And for once, Wall Street stock analysts have been the voices of reason.
In the less than two weeks since CNBC reported Twitter was taking a hard look at a sale, its shares have gone up or down by at least 5 percent on three occasions, or 30 percent of days the stock market was open. Such big Twitter gyrations had happened just 11 percent of trading days over the past two years.
The big moves include Thursday’s decline (so far) of 20 percent, as it seems Salesforce’s CEO is possibly less interested in buying Twitter, and after Recode said potential suitors Google and Disney are sitting on their hands, too. Now, after a wild stretch , Twitter’s stock price is almost back to where it was before the latest takeover drama started.
Twitter shares have reacted to every development in a sale that may never happen, on top of a share price that likely already had baked in a fair takeover premium. Remember, the idea of a Twitter takeover is hardly novel, and it has been one of the biggest movers of the company's stock price before now.
Now, Gadfly enjoys poking the Wall Street analyst community in the eye as much as anyone, but they look more right about Twitter than the wisdom of the stock market crowd. Only 15 percent of 40 analysts surveyed by Bloomberg recommend buying Twitter’s stock, down from about 40 percent at the end of 2015. In recent days, it's been hard to find an analyst who is confident Twitter will get sold at a substantial premium-- if they believe Twitter will be sold at all.
And since Twitter’s finances started getting uglier over the summer, the average price target of Twitter analysts has dipped below the company’s actual share price. That’s a clear sign of analyst bearishness, and of the illogic in Twitter stock buyers’ recent bullishness.
If no Twitter buyers materialize -- and honestly, who really knows? -- then it's possible whatever takeover cushion is built into the stock price simply fades away. A sale was always the best-case scenario for the company, and without one investors will have to take a long, hard look at Twitter's ugly condition. Revenue growth is all but gone, user numbers aren't budging and costs are out of hand.
A natural baseline for Twitter's share price may be far lower than current levels. Before the recent craziness, Bernstein Research analyst Carlos Kirjner said a fair target multiple for Twitter was about 9 times the company's estimated Ebitda for 2017. To get to that multiple, Twitter’s stock price would have to fall about 33 percent, to $13.19. That is also more in keeping with the average of analysts’ 12-month stock price target of $16.50.
Essentially, the last two weeks of Twitter madness has changed nothing. Twitter is exactly what we all thought it was: an overvalued company roiled by constant takeover rumors yet too expensive and troubled for any company to rationally buy. Good luck.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Short interest is not outlandish for Twitter, at roughly 2 times the average trading volume, according to data compiled by Bloomberg, so it’s not as if the wild stock swings are being magnified by traders who have borrowed shares betting on a stock decline.
The swings have also been out of hand for Salesforce, whose shares have been hammered as investors worried CEO Marc Benioff might spend 30 percent of his company's market cap for a broken toy he definitely doesn't need.
It's worth mentioning that estimated for Twitter's Ebitda may not be reliable given the company's inability to accurately forecast its own business, and the high number of adjustments baked into the company's preferred measure of non-GAAP earnings.
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