What: Shares of social media networking giant Twitter (NYSE:TWTR) sank $1.97, nearly 4%, on Wednesday to close at $49.50 following a rating downgrade from Wall Street research firm Pivotal Research Group.
So what: According to covering analyst Brian Wieser, who downgraded Twitter to "hold" from "buy" but kept its price target unchanged at $51, "it's time to take money off the table."
Specifically, Wieser said the recent spike in Twitter's share price related to the company's announcement that it was launching video ads should already have been reflected in its estimates, and that the stock momentum could reverse. While Wieser said he believes long-term investors could benefit from hanging on to Twitter, he argued that the company's volatility and lack of substantial profits merit waiting on the sidelines over the short term until more tangible reasons to buy emerge.
Now what: What investors need to ask here is whether Wieser is being too cautious and overlooking a growing social media presence, or whether he's wise in suggesting investors lock in gains on a company that is still losing money on a generally accepted accounting principles basis.
Honestly, it's probably a combination of both.
For the fourth quarter, Twitter announced it had an average of 288 million monthly active users and reached 182 billion timeline views (a 23% year-over-year increase), and that ad revenue per thousand timeline views rose 60% from the previous year, to $2.37. In other words, Twitter is having no trouble attracting advertisers, and if Facebook's success is any indication it could soon be wildly profitable.
On the other hand, Twitter announced a 4 million-person reduction in monthly active users in the fourth quarter from the preceding third quarter, which came as a huge shock to Wall Street and investors. Additionally, Twitter is reinvesting nearly all of its cash flow back into the business, which will constrain its ability to turn a profit.
Personally, I agree with Wieser that it's probably smart to approach Twitter cautiously. Even with rapid revenue expansion and targeted advertising, Twitter's current earnings multiple based on Wall Street's 2018 consensus is about 25. That's not wholly unreasonable for a tech company growing as rapidly as Twitter, but it's not indicative of a bargain, either. Ultimately, Twitter is a volatile social media company that is prone to wild swings and is not for the faint-of-heart investor. I'd suggest risk-willing and long-term investors be patient and wait for a substantial pullback before edging their toes in the water.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Facebook and Twitter. 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.