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 (NYSE: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.
Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.