Why Twitter Dropped as Much as 9 Percent on No News

Henry Truc  |

Microblog company Twitter dropped as much as 9 percent today on no real news or announcements. However, the stock has been paring losses since the early trading session.

Shares are off by about 25 percent from the all-time high of $74.73—which was hit on Dec. 26.—but is still up a healthy 115 percent for investors fortunate enough to get in at the IPO price, and up 25 percent from the closing price of its first trading day.

Wall Street analysts and investors have increasingly become uncomfortable with how high Twitter’s stock price had been trading at, despite the long-term fundamentals and potential of the company.

“Overall, eight of the 27 analysts who cover Twitter, or 30%, have sell ratings on the stock, according to data compiled by FactSet. By comparison, only eight companies in the S&P 500 stock index face a higher percentage of sell ratings. Twitter isn’t in the S&P 500.

When stocks rally sharply, analysts usually jump on the bandwagon and increase their targets to keep pace with the gains. Twitter defies the norm. Only 26% of Twitter ratings are buys, 44% are holds and 30% say sell.”

Earlier this month, Cantor Fitzgerald cut Twitter from hold to sell, but maintained its price target at $32 per share. Morgan Stanley also downgraded Twitter to underweight and has a price target of $33.

Twitter is scheduled to earnings for the first time on Feb. 6, and the pressure couldn’t be higher. Analysts expect a loss of a penny per share on revenue of $217 million. While the excitement around Twitter IT attracts a younger and more desirable demographic than its more staid counterpart in Facebook, there is still a huge gap between monthly active users of each platform. As of December, Facebook reported nearly 1.2 billion monthly active users—which is nearly one billion more than Twitter’s 232 million.

In addition, Facebook has a platform that’s much more suitable for expansion into various revenue opportunities without disrupting its user experience too significantly. Twitter, on the other hand, does not have that same flexibility.

So while the sell-off was not triggered by anything specific, it does make sense that investors may just be ringing the proverbial cash register to capture profits ahead of next week’s earnings.

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