Twitter isn't your typical stock even by the sometimes schizophrenic technology sector standards. I've covered why I believe this investment is full of peril in several articles including a week ago with Two Tech Stocks: One Hero and One Zero. Zynga (ZNGA) appreciated over 25% while Twitter lost about 25% of its market value.
While it's true that after you ignore a bunch of expenses the company posted a fourth-quarter fiscal 2013 profit of 2 cents, considerably better than the expected slight loss, and revenue increased an eye-popping 116% from the same period last year. Without removing those pesky "one-time" charges that seem to happen in one shape or another every quarter, Twitter lost $1.41 per share.
Losing $1.41 isn't the reason for the selloff, though. The problem shareholders face is the stock is priced like a Buzz Lightyear action figure -- to perfection and beyond -- while many key metrics are impressive, including a 600% gain in advertising and 80% increase in data licensing revenue. As you can tell, the company is growing quickly.
Many may ask, "What's the problem?" The problem is monthly active users didn't increase nearly as much as expected and, more important, a significantly larger gain was priced into the stock.
As we know with Amazon (AMZN), Tesla (TSLA) and SodaStream (SODA), bottom-line earnings isn't the most critical metric for a company with rapid growth. Tesla continues to race down the track, but Amazon and SodaStream recently gapped lower after growth expectations diminished. Twitter now joins the others, and Tesla more than likely will, also, before the year is over.
Ok, so Twitter isn't growing, or at least didn't expand as rapidly as hopeful investors bet on -- but now the shares can be bought for 25% less. Does this mean now is the time to buy? I don't believe so.
I think if you sit on your hands and wait for the market to fully digest what just happened, you will have an opportunity to pick up shares for under $50. I will further argue that unless you want to take an aggressive stance in gaining a position, you shouldn't consider accumulating above $40, at least not right now.
Investors trying to catch the Twitter falling knife on Friday are faced with the fact that most gaps down from earnings continue declining throughout the next two to three days. Then, when they "dead-cat bounce," it's usually short-lived, lasting a couple of three days before the stock begins to drift lower until either the company reports fantastic earnings or some other catalyst shifts market sentiment.
In other words, if you're short-seller, Twitter is a great stock. Otherwise, use the service, but don't buy the stock.
If you're already in and now holding a bag full of shares at a loss, your best bet is to sell as quickly as you can. Otherwise, wait until Monday or Tuesday for a technical bounce to exit. Or you could "double down" and write covered calls against the shares.
For example, let's say you're long 100 shares at $60. If you buy another 100 shares at $50, your net cost basis becomes $55. The next step is to sell two $55 strike June call options for about $5 each, reducing your cost basis to $50.
If Twitter recovers and the options are exercised from the buyer, your profit is $10 per share, or 20% in four months. Your profit is capped at $10 regardless of how high the stock moves. But if your main objective is portfolio repair and you're comfortable increasing your position size, this may be an attractive strategy.
At the time of publication, Weinstein had no positions in securities mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.