Twitter (TWTR) debuted its stock last week to much fanfare.
Twitter stock soared 73% in its debut, and the social media company was praised for pulling off an IPO that was much smoother than its big brother Facebook (FB).
But if you think Twitter stock is a strong buy just because it didn’t break the NYSE during its initial public offering, think again. TWTR is overvalued, and not worth buying right now.
Twitter investors who buy right now at these levels are going to suffer a big “fail whale” in their portfolio.
TWTR Is Overvalued
In the run-up to the IPO, I warned that TWTR stock faced some serious challenges. Among these were the broad fears of a tech IPO bubble, slowing Twitter user growth and geographic skew toward less valuable markets.
But massive overvaluation was also a big red flag — even before Twitter stock become publicly available — because of the big buzz around this social media player and the very little profits it has been putting up.
If rumors are true that Twitter is projecting a meager $40 million in 2013 earnings and just $80 million in profits for 2014, that backs out to EPS forecasts of a bit more than 7 cents this year and just short of 15 cents in 2014.
Doing the math on that, the company has a forward price-to-earnings of over 260!
Sure, Internet stocks like retail giant Amazon (AMZN) and social media player LinkedIn (LNKD) trade around 100 times future earnings … but TWTR is pushing the limits. With that much growth expected and already priced into Twitter stock, there’s not much room for error.
Twitter Stock Faces Downgrades
That’s not just one person’s opinion, either, but increasingly a broad consensus among Wall Street analysts.
Stern Agee initiated coverage with “neutral” this week, and while didn’t give a price target said that TWTR already trades at a premium to high-growth social media peers like Facebook and LinkedIn.
And RBC, which started with a rating of “outperform” right before the IPO saw its $33 price target blown away by the first opening price for Twitter stock.
More damningly, immediately after the stock opened at a big premium an analyst at Pivotal Research Group actually downgraded TWTR on fears it was overbought right out of the gate.
This trend is only going to continue as the weeks drag on and Twitter faces the very difficult task of following up its massively successful IPO with some impressive growth metrics.
Now, I do not think Twitter is a fad or that the stock will go to zero … however, it’s important to remember that even a high-growth momentum stock can become a victim of its own success as investors get unrealistic expectations.
With all the media hype surrounding Twitter and its nearly flawless IPO, it’s natural for investors to be giddy about TWTR stock.
But irrational exuberance never ends well. So if you like Twitter as a company, wait for the valuation to become more reasonable before investing in this social media stock.
More on TWTR Stock
- Twitter stock soars in its NYSE debut. (USA Today)
- On that day-of-IPO downgrade. (CNNMoney)
- 7 reasons I am bearish on Twitter post-IPO. (InvestorPlace)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.