Twitter’s Looking Oversold and Due for Growth

Jacob Harper  |

It’s been a tumultuous week for social media megastar Twitter (TWTR) this week. Really, it’s been a bad year, with the stock shedding just a hair short of half its value in 2014. That’s correct, Twitter investors who were unlucky enough to have invested at the beginning of the year have now lost 50 percent of their money.

Where one loses another gains, and in this case the cashout favored Twitter’s early investors and employees. The much-ballyhooed “share lockup,” wherein longtime Twitter stockholders were prevented from selling their stakes for the first six months Twitter wa one the market, expired. And thus allowed the early birds to get the worm, while those who came late were left with the scraps.

Investors Hit the Unfollow Button

But still, they tried, and while at first it looked like the post-lockup selloff wouldn’t ding Twitter too badly, it did indeed. At first crack insiders who had long awaited their payday unloaded shares at a dizzying clip. Twitter's stock, in turn, tanked. When the dust cleared, Twitter was sitting at $30 a share, way down from its Dec. 2013 high of $74.

On Thursday, a rebound began. Shares of Twitter climbed 4.24 percent on heavy activity, as people bought back in. And while that mini-rally erased a scintilla of Twitter’s selloff losses, technical factors indicate there could still be room to grow.

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Fundamentals Say “Go Away,” But Technicals Say “Come in and Stay Awhile”

There’s still an awfully lot not to like about Twitter. Their last earnings report was a big disappointment. They’re not growing quite fast enough, and have failed to branch into a successful differentiated service like Facebook (FB) has with Instagram. And the less said about the company’s forward P/E of 124 the better.

However, even in an age where tech growth plays have taken a beating, Tech has never been an industry to hew closely to the fundamentals. Twitter’s Relative Strength Index, or RSI, currently sits at 26. Anything below 30 suggests the stock is undervalued.

On Thursday Morgan Stanley (MS) agreed with that assessment, upping their rating on Twitter from underweight to equal weight, reversing a Jan. 9 downgrade. The previous two analysts to weigh in – Deutsche and CRT Capital, both on April 30 – reiterated “buy” ratings while assigning price targets of $52 and $45, respectively.

While Twitter returning to its high north of $70 anytime soon is unlikely, a rebound following the insider sell-off appears to have some validity. If this week, where the stock nearly dropped below $30, was truly Twitter’s bottom, they look to have some room to grow and pick up some of the followers they've lost.  

Prior to Friday's trading action, Twitter was priced at $31.96 a share.

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