Twitter Inc (TWTR) Stock Fluctuations Make Hedging Cost Higher


The stock price of Twitter Inc (NYSE:TWTR) fluctuated since its initial public offering (IPO) at $26 per share. The equities of the microblogging declined 17% amid a series of downgrades initiated by Wall Street analysts last week. Today, the stock is up by almost 2% to $58 per share.

According to Bloomberg, the up and down movement of the shares of Twitter Inc (NYSE:TWTR)— its first earnings report and 119% increase in stock price made the hedging costs of its investors higher compared with other companies listed in the Russell 1000 Index.

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The news agency noted that that Twitter Inc’s (NYSE:TWTR) implied volatility, the proxy for future movement used to determine the price of equity derivatives was 93.03 last January 10, three times higher than the average for stocks listed in the Russell 1000. The only company with higher implied volatility was Ariad Pharmaceuticals Inc (NASDAQ:ARIA) based on data compiled by Bloomberg on 30-day contracts closest to the stock.

Twitter: Investor’s concerns       

Kurt Ayling, media, telecom, and technology desk analyst at Susquehanna Financial Group opined that investors are compelled to hedge or protect the gains in Twitter Inc (NYSE:TWTR) because they are uncertain whether the micro blogging company is capable of delivering adequate revenue or user growth to justify its valuation.

Ayling commented, “There’s a lot of uncertainty around the stock so people are, for the most part, using options to hedge or outright short the stock. Sentiment around the stock has changed a lot at the start of this year as people quickly shifted gears, and all of a sudden valuation concerns became a major part of the story.”

The valuation of Twitter Inc (NYSE:TWTR) is higher based on expected sales compared with fellow social network companies including Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD).

Twitter’s estimated financial results

Twitter Inc (NYSE:TWTR)  scheduled to release its first financial results as a public company on February 5. Analysts estimated that the company will deliver $217 million sales and $20.6 million operating loss for the fourth quarter.

Analyst ratings

Twitter Inc (NYSE:TWTR) rose after Goldman Sachs analyst, Heath Terry recommended a buy rating with a $65 price target for the shares of the company. The analyst previously had a $46 a share price target for the stock. Terry noted that Twitter experienced “significant acceleration” in innovation during the fourth quarter.

On the other hand, Rob Sanderson, analyst at MKM Partners LLC believed that opportunities with Twitter Inc (NYSE:TWTR) are huge, it is a momentum stock with a supply and demand issue. Sanderson has a buy rating for the stock.

Last week, Scott Devitt of Morgan Stanley and other analysts recently downgraded their stock rating for Twitter Inc (NYSE:TWTR), which prompted a 17% decline in the stock price of the company. Devitt believed that the success of the microblogging company is far from guaranteed.