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Why Twitter, Inc. Might Keep Tanking

By Brian D. Pacampara, CFA – Feb 6, 2014 at 3:30PM

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Does this analyst make a good case or is it just more noise from Wall Street?

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, Inc. (TWTR) plummeted 20% today after the microblogging service posted disappointing quarterly results and received a downgrade -- neutral to sell -- from UBS.

So what: Along with the downgrade, analyst Eric Sheridan lowered his price target to $42 (from $45), representing about 35% worth of downside to yesterday's close. While contrarians might be attracted to today's earnings-related 20% pullback, Sheridan thinks there's plenty of room to fall given the escalating concerns over Twitter's mainstream adoption rate.

Now what: According to UBS, Twitter's risk/reward trade-off continues to be unattractive. "Twitter remains one of the most expensive stocks in our universe -- an outperformance that we believe is unlikely to be sustained given questions raised by the earnings report," noted Sheridan. "A lack of mainstream adoption or a more simplified use case was a worry of ours coming out of the IPO & seems to have come to the fore faster than we had anticipate." Of course, with the stock now off more than 30% from its December highs, those worries might be providing patient Fools with a juicy long-term growth opportunity.

Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends Twitter. 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.

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