Why Twitter Stock Still Isn’t Worth the Investment

twitter-stock“I would personally buy shares of Twitter around $30. It doesn’t look like the stock will trade at that price today. And for that reason, I’ll be steering clear of Twitter stock despite the IPO hype.”

My colleague and Wyatt Investment Research founder Ian Wyatt wrote those words on Nov. 7, the day social media giant Twitter (Nasdaq: TWTR) went public. The article was titled, “Twitter IPO is Overpriced at $45.”

Six months later, Ian looks like a genius.

Twitter shares have fallen 25% since the company’s much-hyped IPO last November. Since debuting at $45, the stock has fallen to $33 as of this morning. Twitter’s fall from grace shouldn’t come as a huge surprise.

For all the bluster surrounding Twitter’s IPO, there was one cold, hard truth: the company wasn’t making money. That hasn’t changed since the company went public.

Twitter lost money yet again in the first quarter. Earnings per share came in at -$0.23, much better than its previous quarter but still a long way from profitability. That’s a far cry from Facebook (Nasdaq: FB), which brought in $668 million in net income in the 12 months before it went public in May 2012.

Facebook shares infamously tanked after the company’s highly publicized IPO. After debuting at $38 a share, Facebook fell to less than $18 within its first four months of public trading. The stock has since recovered … but only because its earnings have been growing at 193% year over year.

Facebook and Twitter share a lot of similarities. They’re exceedingly popular, universally known social media companies whose initial public offerings inspired considerable fanfare and excitement. Because of that excitement, both companies opened at share prices well above what their underlying fundamentals warranted.

Despite being profitable, Facebook’s near-record $16 billion IPO overinflated the share price to the point where the stock opened at more than 100 times earnings. Eighteen months later, hype fueled Twitter’s IPO to an even less sustainable price. The stock began trading at 16 times 2015 revenue estimates, a 60% premium to Facebook’s valuation.

Facebook managed to turn things around by growing earnings. Twitter stock won’t be able to follow suit until it actually becomes profitable. Eventually, companies have to prove they’re capable of meaningful growth.

The good news is that Twitter’s revenues are growing exponentially. The company did $250 million in sales last quarter, up 119% from a year earlier. Twitter officials expect revenue to balloon to as high as $280 million in the current quarter.

But revenue growth with no profits can only get you so far on Wall Street. Just look at fellow social media stock LinkedIn (Nasdaq: LNKD). The company came out of the gates hot after going public in May 2011. But shares have backtracked of late, falling 13% in the last year as the company’s profits have slipped.

Eventually, Twitter might get beaten down enough to become an attractive investment. Perhaps, as Ian wrote six months ago, that happens when the stock falls to $30 a share … a number it’s already getting dangerously close to.

Until then, Twitter stock looks more like a cautionary tale than a smart investment.

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Published by Wyatt Investment Research at