Twitter Inc (NYSE:TWTR) has been downgraded to Sell by Pivotal Research analyst Brian Wieser citing that the opening trading levels were above the 15% range of the $30 price target given by the analyst in an earlier report. Though Wieser earlier gave a target of $29, he raised it to $30 after Twitter raised the final offering price to $26.
Based to the analysis of the micro blogging site’s growth prospects, catalysts and the discounted cash flow valuation, the analyst believes that Twitter’s share should trade in high 20s or low 30s, and that into the high 30s and beyond, stock is “expensive.”
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Twitter Inc (NYSE:TWTR) stock opened at $45.10, and the report notes that at $45 the valuation of the company is $30 billion, which is same as the valuation of other big and established companies like Discovery communications, Omnicom Group and others. Twitter’s trading at $45 can be held right under the expectations that the company is capable enough to generate more than $6 billion in annual revenue by 2018. But this could be too optimistic an approach considering the present scenario and industry environment.
Facebook Inc (NASDAQ:FB) is a better stock, as of now, according to analysts. Facebook has been assigned a price target of $57.
“To the extent that loftier-than-we-expect revenue expectations are realized by Twitter, there would seem to be at least a comparable chance that loftier than-we-expect revenue expectations would be realized by Facebook, too,” believes the analyst.
The report says that both Facebook and Twitter are not direct competitors though both of them are influenced by the similar trends, and clinch their major share of profits from the digital advertising industry.
Risks to valuation
Key risks that may affect Twitter Inc (NYSE:TWTR) valuation are that the company might be in need of extra cash beyond raising funds through its IPO to continue its business. Also, the valuation of the company can go down if it requires acquisitions beyond what analysts have baked into their models.
Twitter Inc (NYSE:TWTR) offers a product that has not been tested by the advertisers yet, and there may be some constraints to its growth that can affect the valuation. Twitter’s stock will tend to be more volatile, just like Facebook, where investors will follow the recent momentum in any given direction. Investors will tend to sell the stock once their lock up period ends if Twitter Inc (NYSE:TWTR) stock reels in low after its IPO.