Twitter is far too overvalued

When Twitter made its market debut on Nov. 7 it was worth $26 /share – which some already deemed too high. However, its share price has increased by more than 169% – to around the 70 dollar mark.

Why? That is a bit of a tricky question to answer considering that there has been no company news to back the increase in value.

As a result, analysts have been downgrading the stock.

Ben Schachter at Macquarie recently downgraded “TWTR”. He made the following comment:

We expect this to be among the shortest downgrade note you’ve ever read, as nothing fundamentally has changed since our Neutral initiation on Dec. 11, except that shares have risen 40%. When we launched on TWTR 15 days ago, we laid out pros and cons and stated that TWTR was worth $46/share. Since that time, on the back of virtually no new news, the stock has risen in value 40% (vs. 2% for the S&P 500). Since the IPO open on 11/7, TWTR shares are up 62% (vs. a 4% gain for the S&P 500).”

He added that despite downgrading the stock he does see potential in the company.

“We continue to believe that Twitter as a company has a bright future and many opportunities ahead. However, as a stock, we believe nothing has changed over the last 15 days to justify the rise in valuation. Therefore, we are reducing our rating to Underperform, from Neutral, and maintaining our estimates and $46 target price.”

Following the Macquarie downgrade shares dropped by 3.3% to $70.90.

Market Business News previously reported that Twitter is overvalued on the basis that the company has yet to make any profit in its 7 years of existence and that the price is driven by an “overly optimistic” market.

It becomes evident that the company is overvalued when you compare how its value is calculated compared to other online media giants such as Facebook and Google.

The social networking site Facebook (on average) trades at roughly 16 times its yearly revenue.  Google trades at about 7 times its yearly revenue. On the other hand, “TWTR” is valued to be worth more than 50 times its projected revenue.


Update: Twitter shares dropped by 13 percent ($9.56) down to $63.75 when markets closed on Friday.


 

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