Are social-media stock jumps real or just year-end window dressing?
republished with permission from Wall Street Analystoriginally posted by Vani Rao, 12/27/13
Micro blogging site Twitter (NYSE: TWTR) is indeed having a roaring Christmas this year as its shares have nearly tripled since its IPO in early November. Stocks in the social media company rose 6% on Thursday, and closed at $73.31 per share.
This gives it a market capitalization of a whopping $40 billion. If it were in the S&P 500 stock index, Twitter would be one of the top 20% of the biggest companies. What’s more, the stock jump makes Twitter’s IPO one of the best performers in 2013.
Why is Twitter the flavor of the season?
According to FactSet, Twitter’s recent rally has plumped up its market capitalization to $40 billion, ahead of Target Corp.’s (NYSE:TGT) $39.5 billion and Time Warner Cable Inc.’s (NYSE:TWC) $37.6 billion market cap. What is most surprising is the fact that while Target and Time Warner posted quarterly profits, Twitter is yet to turn profitable.
Apart from Twitter, other social media stocks are also witnessing a boom period. Shares of Facebook Inc. (NASDAQ:FB) have risen 4.7% since the company joined the S&P 500 after closing hours on 20 December. FB has gained 23% this month and 117% for the year.
While there have no major company announcements to bolster the stock price, analysts believe that the stock’s rise could be partly due to investors’ faith in Twitter’s high growth potential and partly due to herd mentality of people buying the stock. Moreover, industry experts believe that the current valuations are irrelevant given that Twitter is yet to report profits.
What is driving the stock?
What then is indeed driving the stock? One important point to note is the trading volume in Twitter shares. More than 82 million shares of Twitter were traded on Thursday. That amounted to more than five times the stock’s 30-day average trading volume.
While Twitter has not made any new announcements in the recent past, the company’s share prices have still increased by 33% in the past week. This could be due to an end of the year rally because funds want to buy Twitter’s stock for their portfolio. Another reason could be that there is a demand-supply imbalance of Twitter stocks, which is driving up the price of the company.
Whatever the case may be, people seem to think that this huge surge is only a technical phenomenon which is not based on strong fundamentals. Moreover, industry experts opine that there could be a correction in the stock prices in early next month. Hence, analysts tracking the stock are increasingly skeptical of Twitter’s bull run and feel that Twitter’s fundamentals no longer support the current valuation, making them maintain a cautious stance on the stock.
What could be the fallout?
With about half of Twitter’s monthly active users remaining inactive over the past month, analysts feel that the stock’s wild run could soon lose its momentum, which in turn could hurt the return-on-investment for people purchasing the stock. While Twitter is seen to have huge growth potential as a popular social platform, near-term concerns over challenges in meeting high investor expectations could sound the death knell for the company. Moreover, with Facebook-owned Instagram emerging as a far superior and popular platform, it may only a matter of time that the Twitter stock could lose luster.