Spotlight: Twitter Inc

Trouble in Twitter-paradise as S&P rated Twitter bonds junk. Why has the sentiment on Twitter (NYSE:TWTR) stock suddenly turned around? The Twitter stock as been a real rollercoaster as the stock price shifted from $26 to $73 falling back to $30 again, climbing back to $55 and it is currently trading at $41.85. Curiously, this all happened within one year's time. So how do investors need to feel about the Twitter stock? Twitter is often compared to Facebook (NASDAQ:FB) after Facebook's successful IPO. But it is important to note that these companies are hard to compare when it comes to profitability and cash inflows. After Twitter's IPO, it seemed that investors expected Twitter to be able to copy the revenue model of Facebook, but if we look at the facts, Twitter has a problem on its revenue side. To be more specific, Twitter reported an earnings per share of $0.01 according to internal accounting methods. Using international accounting methods, Twitter should have reported an earnings per share of -$0.29. If we take a look at the expected revenue for the next year ($0.34) and compare this to its stock price, we note that the price/earnings ratio is a staggering 220. This an absurdly high number, indicating that Twitter is highly overvalued at the moment, unless Twitter is able to innovate extensively to boost its profits. If we look at the chances of this happening, we think this is highly improbable. The growth rate of new Twitter users is diminishing, making it harder for Twitter to be profitable in the future. But Twitter has a plan for the future; it wants to focus more on video's. Yet, we don't think this focus justifies the high stock price of Twitter. Consequently, we think the Twitter stock is destined to fall.