Twitter Bounces

 | Apr 07, 2014 | 1:00 PM EDT
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Twitter (TWTR) was up as much as 2% earlier today, and while I don't think it's safe to go back in the water for the long haul, you might want to consider owning it just for this week.

At the moment, Twitter is off 40% from its December all-time highs of $73, yet it's still double its November IPO price.

Investors still hold about 12% of the stock short, assuming that there's more downside ahead.

The biggest concern for investors came back during the company's first earnings report in January. In this report, we saw evidence that Twitter engagement and user growth had stalled internationally as well as here in the U.S. That justifiably rattled investors who were expecting the service to continue to ramp up in a similar fashion to Facebook (FB).

It started a lot of soul-searching among investors. They've been on board with Twitter's future ability to generate revenue right from the start as a public company. That revenue potential still exists, and Twitter will likely see it through. Investors worry, however, that without user growth the service has become a niche.

There's nothing wrong with a niche service except that it requires a different valuation than a broad service.

Twitter's valuation to this point has been enormously generous to the company and suggested that investors are firm believers that it will reach broad acceptance levels.

In a couple of weeks, we will see the latest earnings results for Twitter. If they continue the trend observed in January, it will be more bad news for the stock.

Twitter's response to this slowing growth has been to try to make it easier for everyday people to get on Twitter and start using it regularly. This simplification of Twitter has (in my opinion) taken some of the sparkle away from the service.

Twitter has always felt this tension between its geeky origins and a desire to appeal to more users. At different points along the way, it has made product tweaks to simplify things. I've always been tolerant of the changes, even though others screamed at the time. The recent batch of changes, however, has made the service more annoying to me, and as a result, my engagement has definitely dropped in the past couple of months.

Sina's (SINA) Weibo unit is seeking to IPO soon. It recently had to cut back the amount it's seeking to raise from the IPO presumably because of tepid interest. Weibo doesn't have as many users as Twitter, but it's more than half the size. If it's lucky, it will get a $3 billion-$4 billion valuation, which is a far cry from Twitter's $26 billion current valuation.

I anticipate further downside ahead for Twitter.



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