There has been something of an ongoing theme for social media stock, with every volatile correction seen as merely that – and the trend seems unwavering even as we approach Twitter’s first earnings update on 30 January.
The low liquidity and trade volume levels are certainly aiding the upside and, for a company that is yet to post a profit, it will be interesting to see how the price reacts when traders return from their holidays.
Twitter’s journey so far
Twitter was undoubtedly the biggest IPO story of 2013. The flurry of activity on the NYSE exchange on its first day of trading saw the stock ramp up a 73% premium to its $26 initial price, as investor interest sent the stock soaring to $44.90 per share. This made it the second biggest IPO of an internet company in history, with only Facebook’s moderately disastrous placement surpassing the amount of money raised.
Twitter, not unlike Apple back in the summer of 2012, was and apparently still is de rigueur, and owning it brings with it a status symbol of sorts. The brief foray below the $40 per share mark that followed its launch was exactly that – brief – and merely served as an opportunity for those who had missed out initially.
Social media pressure
Social media stocks as a whole, however, have taken a severe tumble in the past few trading sessions, with LinkedIn, Yelp and Facebook all feeling the pressure, and Twitter investors have certainly not escaped. Since the company's placement we have watched the stock go somewhat parabolic with the share price almost doubling, but it was eventually capped at $75 and the sell-off following these record highs was punishing; the stock fell by some 14.6% in a matter of days and dipped below the $60 per share mark.
Much of this extreme move to the downside indicates that investors may well have been questioning the company valuation, primarily in light of the fact that the social media company is not expected to earn a profit this year or even next. The downgrade by Macquarie would not have helped either. Some blame could also be directed towards the tight supply in stock, as there has been an argument that Twitter did not offer a sufficient amount in its IPO issuance to keep up with demand.
Despite this cap, the share price soared past a lot of analysts’ expectations and, when you break it down and look at where valuations lie, the shares still seem almost obscenely expensive. Moreover, given how little price action there has been during the short history of the stocks flotation, it is practically impossible to use technical analysis to attempt to assess where the price may go next. Even from a fundamental standpoint it cannot be compared to other social media stocks as the company is not expected to earn a profit in this or next year. Therefore, from a price-to-earnings or price/earnings to growth ratio basis, valuing the company is fairly difficult.
The $75 recent high and cap will now be the next target for the share price. Any rise through that is likely to create a support level for the stock and could, given the level of exuberance connected to the social media field, put the stock on an even greater upside trajectory.
IG will be offering out of hours trading on Twitter from 13 January.