The explanations for the 20% plunge Twitter Inc. (NYSE:TWTR) shares have suffered over the past couple of trading days are widely varied, but there's a core idea common to all of them... TWTR shares soared 87% over the course of the month before hitting Thursday's peak, and being overbought, were vulnerable to such a pullback. That may not be the overreaching reason TWTR is under fire here, however. (And make no mistake - Twitter shares are still under fire right now.) The true, ultimate reason this stock has fallen sharply of late - and is apt to keep falling for the foreseeable future - is far more alarming.
And that alarming reason is? Newsflash: TWTR is ridiculously, stupidly overvalued, and in no way, shape, or form, can even the stock's now-much-lower price of $60 per share is nearly impossible to justify... even if traders are truly thinking of it as a long, long-term play.
It's undoubtedly going to be an unpopular idea, particularly among the segment of the trading crowd that likes to be vocal (and take personal shots at anyone who voices a dissenting opinion). You may even some of those "colorful" counter-opinions in support of Twitter - at any price - below. That's fine. The only thing a newcomer or a current shareholder needs to think about, and justify, is how TWTR could even come close to eking out more gains when the stock's price has already greatly exceeded the market's norms.
Just to put things in perspective, the average revenue forecast for Twitter Inc. in 2014 is right around $1.0 billion. Even giving the micro-blogging site another year to grow the top line, the pros expect TWTR will generate (and this is a high-end estimate) no more than $1.8 billion in sales. The firms that underwrote the IPO don't foresee anything more than $1.3 billion in 2015. Compared to the current market cap of $33.7 billion, Twitter is trading at 25.9 times its distant forward-looking sales. Compared to the market-typical P/S ratio of 2.5, it's alarmingly easy to say TWTR is ten-times overvalued.
Twitter Inc. isn't profitable yet, and may not be anytime soon. Even assuming it could be profitable in accordance with EBITDA projections of $210 million in 2015 and 2015 EBITDA projections of $395 million, the stock's trading at a distant forward-looking P/E of 85... before factoring in income taxes and any depreciation (TWTR doesn't have much in the way of interest-payment liabilities). That's about seven times greater than the market's normal P/E of 12.0, which is based on a post-EBITDA figure. On a GAAP basis, TWTR is realistically priced somewhere around 100 times future (2015) earnings.
The fans and die-hards will be quick to suggest the revenue and profit outlooks are too low, and that Twitter Inc. is going to blow the outlooks out of the water when the time comes. That's fine - everyone's entitled to an opinion (even a faulty one). Just for the record though, if TWTR does end up doing the impossible and topping sales and earnings estimates in 2014 and 2015, it'll be the first technology and/or social media name at its current stage in its lifetime to do so. When an investment thesis requires a miracle to happen (for the first time ever), it may be time to rethink any optimistic feelings behind your bullishness.
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