While Facebook stock has felt a brunt of the damage, the selling pressure may very well spread to Twitter (TWTR), whose shares look way more expensive.
With analysts turning their back against the social-media company, I’m inclined to sit on the sidelines with the name ahead of what could be a significant congressional crackdown on the broader social-media space.
I am bearish on TWTR stock. (See Analysts’ Top Stocks on TipRanks)
Hot Ad Growth, Regulatory Risks
Twitter’s recent ad growth numbers have been truly remarkable. The company has over 150 million users behind it. With that, a profoundly powerful and unique ability to leverage its network effects, as it moves further into the ad business.
As the company pushes closer to profitability via ad growth and its Twitter Blue subscription service, which recently tested the waters in the Canadian and Australian markets, a sustained move into the green looks within grasp.
There could be some pretty steep roadblocks on the way, as Facebook draws more attention to the social media space. Indeed, many of the negative traits apparent in Facebook’s platforms may not be unique to the company, but the industry.
As such, investors should be ready for a high degree of regulatory uncertainty and even stiff fines, like those doled out by the Chinese regulators to technology companies like Alibaba (BABA).
Twitter is on the fine line between explosive growth and regulatory setbacks. While the company could make a big splash in digital ads over the next decade, it’s hard to get behind the valuation at a time when social media CEOs may be due for more hearings in front of congress.
Could ripple effects from Facebook’s latest backlash spread across the industry?
It’s possible. In any case, valuations in some of the frothier social media stocks like Twitter may be overdue for a valuation reset, given the new slate of risks.
TWTR Stock: Not Cheap
TWTR stock trades at 8.8 times sales and over 64.4 times trailing earnings.
Digital ads and Twitter Blue could sustain the company’s push into the green over the coming years. However, investors may be underestimating the near-term impact of any congressional action that may not just stop at Facebook.
A case could be made for Twitter to join the likes of the dominant behemoths at the top of tech, especially as ad revenues accelerate by 87%, as they did in the latest (second) quarter.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, TWTR stock comes in as a Strong Buy. Out of 23 analyst ratings, there are six Buy recommendations, 13 Hold recommendations and four Sell recommendations.
As for price targets, the average Twitter price target is $71.38. Analyst price targets range from a low of $33 per share, to a high of $90 per share.
Twitter has some pretty explosive growth prospects, but you’ll have to pay up for them with shares trading at around $64 per share.
With more Hold and Sell ratings on the name than Buy ratings, it may be wise to heed the consensus view at this juncture.
Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
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