Investors pushed shares of Twitter (NYSE:TWTR) down more than 15% this week, despite the social media stock posting strong results for its fiscal 2014 first-quarter. With the stock now trading near its 52-week low, many investors wonder whether Twitter has hit its bottom or if it has further to fall. However, the answer may not be as obvious as Wall Street would have you believe.
Under lock and key
Twitter's lock-up period is set to expire on Monday, May 5. Therefore, a cursory glance might lead investors to believe the stock has farther to fall once insiders cash in their chips. The purpose of a lock-up agreement, after all, is to prevent executives or insiders from selling large stakes in a company immediately after the initial public offering. However, once this 90- to 180-day period is up, shareholders are free to sell as much stock as they please.
In Twitter's case, around 81% of its common shares outstanding will become eligible for sale next week. However, that doesn't necessarily spell disaster for the company. For starters, the market has known for months now that Twitter's lock-up period would expire in May, so it's likely that some of the downside is already priced into the stock. Not to mention that, given the sharp sell off of the stock recently, some shareholders may choose to sit tight until shares have a chance to recover. Additionally, numerous insiders have confirmed their intention to hold on after the lockup expiration.
There's no doubt that Twitter's stock needed to come down from its highs of around $74 a pop. Yet even with its stock price below $40 a share today, Twitter still trades at a $22 billion market cap. For comparison, rival social stock LinkedIn (NYSE:LNKD) currently boasts a market cap of $19 billion. However, LinkedIn plans to generate more than $2 billion in revenue this year and has a user base north of 300 million (something Twitter merely aspires to). Moreover, Twitter hopes to book just $1 billion in revenue this year.
Throw in Twitter's price-to-sales ratio of 33, one of the highest in the industry, and you have a stock that's still pricey at today's levels. As a company, Twitter should be able to continue growing ad revenue in the future, which makes it a good long-term play for patient investors. However, shares could have farther to fall in the near-term as investors worry about user adoption.
Slowing user growth should continue to weigh on Twitter's stock. In the company's earnings release this week Twitter said it added 14 million monthly active users in Q1, bringing its total audience to 255 million. That's weak juice compared to rival Facebook (NASDAQ:FB), which now counts 1.28 billion monthly active users among its friends. Moreover, it's unlikely that we'll see a massive spike in Twitter's monthly active users anytime soon, because it still isn't clear how Twitter plans on addressing the issue.
The social media giant is reportedly working on a "whisper mode" that would let users send private messages to more than one friend at a time, instead of the pesky direct message feature it currently has. However, this doesn't confront the bigger problem: getting Twitter to appeal to the masses. Ultimately, Twitter needs to better position itself as a mainstream social media platform like Facebook instead of the niche service it is today. On that score, I think investors will continue to push shares of Twitter lower, at least in the near-term.
Tamara Rutter owns shares of Twitter. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.