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Wall Street gets more bearish on Twitter shares

9:26 PM, Jan 8, 2014   |    comments
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(USA TODAY) - During the run-up to Twitter's initial public offering last fall, investment banks, stock traders and professional money managers were practically climbing over each other to get any amount of IPO shares they could.

Now, just two months after the blockbuster offering, Wall Street has become more bearish on the company's stock.

As of this week, seven equity research analysts who cover Twitter are rating the shares a "sell," according to FactSet research.

That's the same number who rate them a buy, according to FactSet.

By contrast, the 1,800 technology companies in the S&P 500 Index have an average buy-to-sell ratio of 10-to-1, according to John Butters, senior earnings analyst at FactSet.

Another 12 analysts who publish research on Twitter are on the fence about the stock's prospects, rating them a "hold" or "equal-weight."

Analysts also have been lowering their expectations for the company's bottom line for both the fourth quarter of 2013 and for this year's first quarter.

For example, the 20 analysts who've published financial reports for Twitter's current period ending in March now expect the company to report a loss of 3 cents a share.

One month ago, the Wall Street consensus was for a break-even number, according to FactSet.

For the quarter ended in December, estimates have ticked down from a 1 cent loss to a 2 cent loss since the IPO.

And those are the so-called adjusted profit estimates, favored by bullish Wall Street analysts, which exclude Twitter's large and recurring costs for employee stock option expenses.

Include those significant costs, as public companies must do on their income statement, and Twitter's net loss per share will be significantly wider than the buffed-up Wall Street estimates for many quarters to come.

So what's behind the rapid shift among investors toward a more-bearish prevailing on Twitter?

First, blame the company's lofty valuation -- rich even by the standards of the ongoing social media stock boom.

At a stock price of $60, Twitter has a market valuation of about $32.5 billion, or 29 times expected 2014 revenue of $1.13 billion.

That's significantly higher than the price-to-sales ratio of Facebook, which is now valued at just under 14 times this year's revenue estimates of $10.4 billion.

Twitter's price-to-sales ratio is also richer than that of LinkedIn, even though LinkedIn is profitable and its revenue is expected to be almost double that of Twitter this year.

LinkedIn's price-to-sales ratio is also about 14, in line with that of Facebook and half that of Twitter.

Another factor at play is the large number of shares held by company insiders that will become available for sale once post-IPO restrictions end.

These so-called lockup expirations are the same kind that pressured the shares of Facebook during the year following its IPO.

In May, the lockup on 454 million Twitter shares is set to expire, according to its filings.

That's likely to add to Wall Street's Twitter pessimism for months.

The company said this week it will report first-quarter financial results on Feb. 5.

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