The Prisoner’s Dilemma Dictates Selling Twitter Now

In my article, The Art of Valuing Twitter, I suggested that investment analysis incorporates both art and science. I made a point that the reason many analysts could not understand Twitter’s (Nasdaq: TWTR) flamboyant gains since its IPO was because of their inability to see the artistic beauty in TWTR. Take note, though, that my report late last year recommended finally selling the shares then because of what was to come in early 2014. Today, I’m looking good, because the stock is being cut at the knees by the very scientific factors I suggested in late December, and the disruption they are causing to the artistic argument. Investors now face the prisoner’s dilemma, whereby each is more likely to sell the stock out of fear that the others will first, which would cost them capital.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Twitter

Twitter (TWTR) shares soared in 2013, gaining 42% since its public open and 145% from its IPO price of $26 per share. This year, the stock has been facing formidable headwinds of increasing and intensifying analyst opposition. TWTR is down now about 10% year-to-date and by the same amount since I recommended investors sell the stock on December 27, 2013. Today alone, it’s lower by 5.6% as of the hour of scribbling here. I expect the shares to correct further heading into the company’s first earnings report for many reasons, but mostly because of fear of one another.

Chart at Yahoo Finance

The latest reason for decline is that yet another analyst has issued a negative view. Cowen & Co. analysts today initiated coverage of Twitter with an “Underperform” rating and price target of $32, or 43% short of the current price. I don’t know about you, but I would call that a sell-worthy expectation, because I do not see the benchmark stock market crashing this year!

For Twitter, the valuation has never made sense to most analysts. However, it makes some sense in one respect. Take note that while Twitter trades at a significant premium to its peers in terms of price-to-sales ratio, its sales growth far exceeds those rivals as well. Importantly, Twitter’s sales outlook for 2014 exceeds the company’s intrinsic sales growth rate. Still, on a relative basis, Twitter’s P/S-to-sales growth ratio shows a premium valuation to peers.

Stock	Price-to-Sales  ttm	’14 Exp. Sales Growth	P/S-to-Sales Growth
Twitter (Nasdaq: TWTR)	60.4X	77%	0.8
Facebook (Nasdaq: FB)	20.8X	36%	0.6
LinkedIn (Nasdaq: LNKD)	18.0X	43%	0.4
Google (Nasdaq: GOOG)	6.6X	16.4%	0.4
Yahoo (Nasdaq: YHOO)	8.7X	2.3%	3.8

Twitter does not earn a profit yet, so we cannot compare it to peers on a P/E or PEG basis. And this brings us to the main reason why I expect Twitter to “underperform” in early 2014. The company will finally report earnings for the first time in its young history. While I expect its forecasts were conservative when it came public, I’m not sure the company can live up to recently built in exceptional investor expectations. That upcoming EPS report will mark the first true trial of Twitter on the public scene.

Even so, Twitter is facing other trials today. First of all, “window dressing” is no longer helping the stock, as the close of the year ended that reason for public fund managers to buy it. Having done so in 2013 would have allowed managers to list the famously flying stock as one of their own successful investment decisions. They do this, hypothetically speaking, in order to attract new inflows of investment capital.

Secondly, investors who had enjoyed big paper profits through 2013, can now take those gains and put off paying taxes on them until next year. Given the stock’s amazing gains through 2013, investors had a lot of capital at stake, and the time value of money dictates delaying such tax payments on capital gains.

Without Street analysts’ support and without capital flow favor, what reason does an investor have to carry TWTR into earnings? The “prisoner’s dilemma dictates that shareholders will shed their shares now out of fear that other investors will before them and drive the stock lower.

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