While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Twitter (TWTR) fell 5% today after Wells Fargo downgraded the microblogging giant from market perform to underperform.
So what: Along with the downgrade, analyst Peter Stabler maintained his valuation range of $36-$39, representing about 35% worth of downside to Friday's close. Although Stabler remains bullish on Twitter's long-term prospects, he believes the current valuation doesn't discount enough of the growth hurdles ahead.
Now what: According to Wells, Twitter's risk/reward trade-off is rather unattractive at this point. "[W]e believe investors underestimate some challenges facing the company and advertisers seeking to employ the platform," noted Wells. "Specifically, (1) widely varying degrees of consumer engagement, (2) discounting of engagement metrics/high costs, (3) potential challenges to rapid adoption of TV related products, and (4) amplification risk associated with marketer mis-steps using the platform." When you combine those challenges with Twitter's lofty price-to-sales ratio of 60, holding out for a wider margin of safety certainly seems prudent.
