Twitter Might BeTroubled, But it’s Still Undervalued

Jacob Harper  |

Befitting an industry that has become worth hundreds of billions of dollars in just ten years, the social media space has become a wee bit competitive. And as with any competitive industry, winners can become losers quicker than you can say “new paradigm.”

Hello, Friendster! Goodbye, Friendster! Hello, MySpace! Goodbye, MySpace! Hello Twitter (TWTR) ! Goodbye…

Not so fast.

Twitter had been looking pretty rough the last couple months. Growth was slowing significantly, and the stock was halved on major concerns that Twitter’s platform had committed the cardinal sin of social media: it had become passé. But passé doesn’t mean dead, and in fact Twitter still has room to grow.

Dealing With a Sea Change in Online Communication

As opposed to the open share-everything ethos of early Facebook (FB) and Twitter, social media usage is definitely trending towards selectivity and privacy. Think Snapchat and other “disappearing” messaging/social media apps.

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But Twitter is still in the monetization phase, and there is little chance of the monumental, sudden collapse of Friendster and MySpace. While the stock did become overvalued, the correction was far too sharp, something we surmised on May 8, when we noted Twitter looked oversold at $31.96 a share.

Shares got as low as $29.56, but that has, for the time being, proven to be the bottom. From those dark times, the summer started looking a lot sunnier for the microblogging service.

Bring Out the Twitter Bulls

Analysts have been tending to agree. On May 16 Wunderlich upgraded shares of Twitter from Sell to Hold. Hardly a ringing endorsement, but they certainly agreed that the stock was no longer a sinking stone.

On May 28 Nomura was even more bullish, upgrading to Buy and reiterating a $43 price target, or a more than 30 percent premium on shares. Analyst Anthony DiClemente noted that Nomura “believed ‘enough is enough’ and that the current price offers investors a unique opportunity to own a now-underappreciated digital media asset."

DiClemente’s argument for being optimistic on Twitter isn’t just about a market overreaction. He expects Twitter’s user monetization to eventually catch up to Facebook. Despite slowing growth, Facebook has been exemplary at getting users to stay on the site longer while better targeting ads, both recipes for success in social media.

Twitter still has a litany of problems to work out: product diversification; user growth; simplifying the service to increase broad appeal. But for the time being, investors are willing to give Twitter the benefit of the doubt that while their brand might not be Snapchat, they’re certainly not ready to “get MySpaced.”

On news of Nomura’s upgrade, shares of Twitter rose 10.64 percent to hit $33.76 a share.

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