3 False Reasons Twitter's Stock Is Trending

Source: Twitter.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks backed off Monday's record high close today, as the S&P 500 fell 0.3%. The narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) also lost 0.3%.

One stock bucked that trend, as shares of Twitter (NYSE: TWTR  ) added to yesterday's 9.3% rise for a two-day gain of 15.7%. So far this month, the stock has risen by a quarter. There is no explaining this week's price action, with no major breaking news concerning the company -- although that has not stopped pundits from trying.

Sure, the company released targeted ads that are tailored according to users' Web browsing history -- but that was last Thursday. These ads are expected to fetch higher ad rates.

Yes, Twitter added the capability to share photos via direct messages, something they announced on a Twitter blog today. That helps Twitter compete with messaging applications, which appear to be very hot in an overheated market for superfluous applications. Witness the $3 billion offer Facebook (NASDAQ: FB  ) made for Snapchat -- a company whose content literally vanishes almost immediately. On that basis, perhaps being able to attach pictures to direct messages is easily enough to justify today's $1.6 billion increase in Twitter's market value. In the rational world, however...

Finally, the most absurd explanation I read for Twitter's share "pop" is a rumor according to which legendary activist investor Carl Icahn is buying the stock. Icahn didn't become the second richest investor in the U.S. (behind Warren Buffett) by buying stocks that are almost certainly overpriced. Apple at an enterprise value of 2.6 times the next 12 months' revenue estimate, yes. Twitter at 29 times – certainly not.

Since pundits are using stale or fanciful information to explain why the stock is going up, I'll refer to news from last week to argue that users ought to be wary of a correction. Last Monday, Twitter's underwriting banks initiated coverage of the stock, with only two of the five (Goldman Sachs and Deutsche Bank) meting out a "buy" rating. Two rated it a "hold" (Morgan Stanley, JPMorgan Chase) while Bank of America Merrill Lynch had the temerity to issue a "sell" rating.

That lack of enthusiasm is notable -- even exceptional, perhaps -- for banks that will be vying to do more investment banking business with this high-profile name down the road. At just under $52, Twitter's stock price is above the price target of even the two most optimist of the underwriters (Deutsche Bank's is $50, Goldman's is $46.) When people who sell stocks for a living are bearish -- or even lukewarm -- on an issue, it's no time to be rushing into it.

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