Color Me Skeptical on Twitter

 | Dec 06, 2013 | 10:25 AM EST
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Twitter's Bump May Not Last

Twitter (TWTR) is having a great week. Even though shares are down today, they've risen about 10% in the last five days.

What's up? Analyst upgrades.

Basically, all the analysts who helped take the firm public last month are out with many glowing initiating coverage reports to talk up the stock. Previously, the stock was dipping into the $30s, and all of this has taken it into the mid-$40s.

Can it continue? Sure.

One thing I've noticed in the last couple of months is that advertisements are increasingly appearing in my Twitter timeline -- lots of ads from lots of different sources. It only seems to have increased since the initial public offering.

This suggests to me that the company is doing its utmost to have a great holiday fourth quarter, and to have a terrific first earnings out of the IPO shoot. This could remain helpful to the stock between now and the end of January.

However, as I said the day of the IPO and as I still believe, this is a great company with a stock price that is way overpriced. I won't touch it at these levels -- but I still believe it will come back to earth. To me, a natural level appears to be a back in the low-$30s. That said, I certainly think if I were looking at this company cold and on an anonymous basis it should be trading in the low $20s.

Will it come down so much from close to $50? I think it will between now and 6 months from now.

Remember that Zynga (ZNGA) shot up to $14 post-IPO when it did a secondary offering. Groupon (GRPN) zoomed to $30 before feeling the forces of gravity kick in.

I'm not saying Twitter is destined to follow a similar post-IPO trading pattern. It's never that easy when you're picking stocks. I am, however, saying that the first couple of months of post-IPO trading are not predictive when it comes to the stock's levels in another six or 12 or 18 months.

The Twitter bulls believe Twitter can trade at what seems like will be sky-high price-to-sales ratios because CEO Dick Costolo has just started to turn open the revenue valve. Many new revenue services will be rolled out over the next year. Therefore, looking as the past 12 months of revenue is just meaningless.

So color me skeptical. They might be right, and we may see the stock to continue to move up. I believe I can sit this out and do better on less conspicuous names that are more fairly priced with some obvious catalysts in the next year.

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