Saturday, November 30, 2013

Twitter Valuation

When an investment banker evaluates a company for an IPO, he will make a table showing the relative valuation of the stock compared to like companies.

Recently, social media companies have made popular initial public offerings.

Forbes posted such an evaluation including TWTR.  You will find it here.

http://www.forbes.com/sites/darcytravlos/2013/11/30/what-are-you-worth-to-social-media-stocks-it-must-be-more-than-advertising/

This is a very well done analysis.

If you look at the table given, you will see that TWTR has a valuation behind Facebook and LinkedIn.

While Twitter's market cap is almost that of LinkedIn, its revenues are only a fraction of LinkedIn.

While TWTR's revenue per member is half of Facebook and LinkedIn, its market cap per member is about that of Facebook and LinkedIn.

This chart tells us that TWTR has the highest valuation of the eight social media stocks listed.

However, the most important factor in such a chart is missing. This factor is growth. Growth juices investors more than anything else. It should have been one of the first factors listed.

We suspect that those who are paying up for TWTR stock are motivated by its growth potential. They argue that TWTR has a huge market left, and that it will be able to monetize that market and that the revenues will accelerate.

Frankly, I regard paying up for growth to be one of the most risky things you can do. Sooner or later competition shows up to curb your growth. Sooner or later your markets are saturated.

If the company releases its sales and earnings and the growth is suddenly, unexpectedly slowing -- not declining, just decelerating -- the stock will suffer great and rapid pain as the market re-evaluates the multiples used to compute price.

Such a stock could lose one-third of its market value in one day.

Only someone with a working crystal ball can confidently predict growth.

As it is, we still do not see the upside in Twitter at this valuation.





Monday, November 25, 2013

TWTR Aftermarket

Here is today's chart for the Twitter IPO:


Chart courtesy of StockCharts.com 

As expected, TWTR broke its $40 support level. Volume is up. We would expect some selling momentum to develop.

We do not expect the underwriter to support the stock this far above the offering price. The underwriter's duty is to the IPO buyers, not those who bought much higher up.


Tuesday, November 19, 2013

TWTR Trading

Here is today's chart on Twitter.



Chart courtesy of Stockcharts.com 

Let's take this apart.

First, day one we see large volume of trading as in most new issues. The stock bounces off a high of about 50 and closes lower. Typical of a stock that has a premium. The rabid buyers  bid it up, run out of gas and it closes down a few points.

For the next number of days, it sets up a support level at 40, nice round number like many such support levels. The resistance is about 46.

So we would easily expect trading in that range until a breakout.

If you are an underwriter who put a client in a hot IPO like this, you will not be happy if they flip it out immediately. If they do flip it in the first few days of trading, their allocation on the next hot IPO is likely to be reduced. Knowing investors will be grateful instead of greedy and hold off selling for a decent interval.

But as time wears on, these lucky friends of the underwriters will be likely to take profits and move on. The trading desk of the underwriter will be trying to hold the bid. It is horrible to think they may have been short when the deal started trading.

Will buying come in an push it over 46? Seems doubtful to me. After all the trading so far, who is left to buy and why?

 The bull case consists of future projections that may or may not occur, supported by the smart investors already in the deal. The bear case is the current valuation, far above what the underwriters thought it should be in the IPO.

My instincts are to take what is real now, and discount the dream of the future.



Wednesday, November 13, 2013

TWTR -- Twitter Early Trading

In the early trading in TWTR, looks to me that the IPO stock was allocated to institutions who want to hold it long term. Surely some long term investors jumped in and bought in the after market. It is rumored that some of the institutions that got allocations in the IPO wanted more and bought more in the aftermarket, resulting in the high price. As the company did not sell much of the company, supply was limited. 

With the high price, the shorts are drooling. Here is a chart of the trading to date:


  Chart courtesy of Stockcharts.com


How do we look at this? 

We have panic buying on day one. Some selling or profit taking on day two. Demand takes the stock up slightly on day three. 

It is hard to believe that a stock that went to this high a premium in the first week of trading can hold its gains.

The shorts are circling for the kill and I for one believe they will be on the right side of the market. 

When the long term investors who are willing to buy at this price are gone, who will buy? When you compare the amount traded with the new IPO shares, it looks like all who want in are in now.

 Do you believe as a trader that if you jump in at 42, you will see the stock jump to 50 in the next few weeks?

Rather, it seems more likely we see a 10% drop.