Is Twitter a buy after today’s massive pullback? Well, it depends

Twitter (NYSE:TWTR) fell roughly 17% today mainly due to a the release of 489 million shares held by insiders during the mandatory 180 day lock-up period. This represents about 86% of the 570M shares that are currently on the market. For those who aren’t familiar with the term, a lock-up period is a period of time (usually 90-180 days) after a company’s initial public offering that prohibits company insiders from offloading their shares into the market. This is a safeguard put in place to prohibit newly minted millionaires from causing drastic sell side pressure on a recent IPO company.

Until today’s drop the company had astronomical metrics with the company trading near a thousand times 2014 expected earnings. Today’s decline has made the ratio a bit better with the Forward P/E sitting at around 250 times. In comparison LinkedIn (NYSE: LNKD) shares trade at 50 times forward PE while Facebook (NASDAQ:FB) trades at 34 times. Albeit, Facebook has a much higher market capitalization.

Since it's IPO date in early November, Twitter has fallen 29%. Since it's high in December, 57%

Since it’s IPO date in early November, Twitter has fallen 29%. Since it’s high in December, 57%


Twitter is still pricey compared to earning, there’s no doubt of that. But here are three reasons to consider picking up the stock following today’s decline.

  1. Key shareholders aren’t selling – Co-founders Jack Dorsey and Evan Williams, along with CEO Richard Costolo, have publicly stated they will not be selling their shares in the company. Benchmark Capital Management has also announced they do not plan on selling their shares following the expiration of the lock-up. This shows confidence in future earnings and growth by the stewards of the company. With an IPO price of $26 a share each of these shareholders are still in the black. However, according to an October Forbes article Dorsey owns 22.2 million shares of the company. This would mean since the 52 week high in late December of $74.73 a share he has lost $951 million, on paper. This gives the announcement that they won’t sell their shares even more weight.
  2. Another Corporate Partnership – Yesterday, Amazon and Twitter announced a partnership where customers in the U.S. and the U.K. can add Amazon items to their cart with a hashtag. Twitter users can now tweet #AmazonCart (#AmazonBasket in the U.K.) in reply to an Amazon tweet about it’s newest product to add that item to their cart. As cited in many articles this partnership clearly helps Amazon to a greater extent. However, Motley Fool columnist Leo Sun has written a very detailed article on the partnership pointing out that this experience may benefit Twitter. He argues that in the long run, “small businesses looking to replicate Amazon’s hashtag shopping experience could pay Twitter more to elevated their profiles with Promoted Tweets and Accounts, resulting in stronger revenue growth.” In my opinion the more important perspective is that Twitter is showing it’s shareholders that it is still actively looking for ways to increase revenue. Partnerships such as this one and their fall 2013 announcement with Comcast are positive signs for a company struggling to justify a higher share price. 
  3. The numbers aren’t bad, they’re just not great – With the quarterly release on April 29th Twitter investing hopefuls were a little crestfallen. User growth, revenue, and yearly projections weren’t as great as they’d been hoping. Neither was the companies profit. But there was some good news. (All taken from quarterly press release)
      • Average Monthly Active Users (MAUs) were 255 million as of March 31, 2014, an increase of 25% year-over-year.
      • Mobile MAUs reached 198 million in the first quarter of 2014, an increase of 31% year-over-year, representing 78% of total MAUs.
      • Advertising revenue totaled $226 million, an increase of 125% year-over-year
      • Q1 revenue of $250 million, up 119% year-over-year

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s