Shares in Twitter fell 3.5 percent yesterday after Cantor Fitzgerald cut the company’s rating from “hold” to “sell”, based on what Cantor said were excessive valuations.
Cantor stated that they give sell ratings to firms whose business models have structural challenges, noting that they believe that “Twitter’s valuation to be excessive and currently see materially more downside than upside.”
Morgan Stanley also downgraded Twitter to the less bearish “underperform”. Currently, 20 of 26 analysts who cover Twitter have either “hold” or “sell” ratings on the stock.
So what gives? Andy Busch, editor and publisher of The Busch Update, says Twitter’s valuation is high compared to other companies since its IPO.
“At $26, it was 16.5 times sales and even that was a premium to companies like Facebook, Yelp, and others,” said Busch to CNBC. “At $74, where it eventually got to, that’s three times that. Clearly, that’s out of control.”
Busch cites one main reason why Twitter is overpriced: new shares coming to the market later this year.
“They’re ending a lockup period on February 15,” says Busch. “There are 9.9 million shares that are going to be available. But, the big one is in May – there are 454 million shares that become available. I think that’s why 20 out of 26 analysts who cover Twitter have it either as a hold or a sell.”
Meanwhile, Twitter CEO, speaking at CES in Las Vegas, revealed that he has no idea how many of his users choose to opt out of seeing ads, which is easily done via profile settings.
“You can opt out of tailored ads and content,” he told the audience at CES yesterday. But when asked how many users have doe so, he either did not know, or chose not to reveal this data. “I do not know how many people have opted out of tailored ads.”
My guess is he was caught off guard, and it might not matter anyway – one report from Europe proposes that the opt-out rate is below 5 percent.