Some analysts have been quick to give Twitter the bird — but does the company deserve it?
Twitter’s five lead underwriters evaluated the company on Monday, right after the end of the “quiet period,” a Securities and Exchange Commission-mandated one-month silence after a company’s initial public offering. And one underwriter was chirping to the tune of the Twitter naysayers.
Analyst Justin Post of Bank of America Merrill Lynch initiated a “sell” rating, indicating that the stock is not worth its price ($40.92 at the time of the report, $44.95 at Friday’s close).
Post is hardly the only — or even the first — Street skeptic on the stock.
Just one week after the company went public, Scott Kessler, an analyst at S&P Capital IQ, initiated coverage of Twitter with a “sell” recommendation.
There are plenty of reasons to doubt Twitter, the analysts point out. For one, the 7-year-old company has yet to turn a profit. And its opening price of $45.10 a share — 73 percent higher than its IPO price — valued the company at $31 billion.
Daniel Ernst, founder of Hudson Square Research, maintains that Twitter’s stock value assumes “they’re going to be just as big as Facebook, just as important to your daily life as Google or Apple. … At that price, you’re assuming that all those things are going to happen. And not considering that perhaps it won’t.”
To the doubters, there are important differences between Twitter and that other ballyhooed social-media market debut, Facebook, which successfully tackled its challenge of monetizing its mobile ad space — and within a year’s time.
“Unlike Twitter, where we see all these uncertainties, Facebook has overcome significant challenges they’ve seen over the past year or two,” says Kessler.
“Twitter is even more dependent on mobile than Facebook. It lives and dies in the mobile arena,” says Rob Enderle of Enderle Group, a technology analysis company. “The end result of advertising on mobile is a bigger problem [for Twitter].”
Twitter reported 232 million active users at the time of its public offering — nearly one billion shy of Facebook’s user base of 1.26 billion. International users make up three-quarters of the company’s business, but only one-quarter of its revenue is generated overseas.
“How patient are people going to be?” asks Moshe Cohen, assistant professor of finance and economics at Columbia Business School. “We don’t see signs of profitability for a long time.”
But digital technology analyst Brian Solis of the research company Altimeter Group sees a brighter future, provided Twitter can face its unique challenges as successfully as Facebook.
Like Facebook had to do, Twitter must generate revenue with new types of products, such as promoted tweets. They then must “train investors to see the value of these products,” says Solis.