Ignore Twitter's Dead-Cat Bounce

NEW YORK (TheStreet) -- Social media giant Twitter (TWTR) continues to be an incredible story. But as with other momentum stocks, investors are stuck debating whether they should buy for the long term or simply trade in an out.

As of this writing, Twitter shares are down 1% to $33.60. Last Tuesday the stock closed down 18% to $31.85, following the end of its lockup period.

Recall, the shares traded as high as $74 in December following its November initial public offering at $26. But since Twitter peaked, shares have plummeted close to 60% and are down 47%  for the year to date.

No one is debating Twitter's popularity. But beyond sending out a tweet, no one has been able to explain the point of doing so. Or for that matter, what happens on the other end. Shares of the social media giant are still under pressure following the anemic first-quarter earnings results. Twitter continues to grow, unlike Facebook (FB), but it hasn't been able to satiate Wall Street's growth appetite.

In the most recent quarter ending in March, Twitter reported 255 million monthly active users. It's not a terrible number, given its roughly 25% year-over-year increase. At the end of the fourth quarter Twitter ended with 241 million users. But it's on the low end of the user growth range Wall Street had anticipated.

It's far from enough to convince analysts the company can make any money. Even if we wanted to look on the bright side of that 25% growth, a deeper look would reveal that it's still 5% shy of last year's 30% growth, which indicates a strong rate of deceleration.  This opens questions about user disengagement.

However, the company received some much-needed good news. Robert Peck of SunTrust Robinson Humphrey upgraded the stock from neutral to buy with a $45 price target, which suggest 33% upside potential from current level.

This assumes Twitter can achieve a multiple of 13 times next year's revenue estimates, which calls for $2.03 billion. This year's full-year revenue is projected to be $1.27 billion and the stock trades at just nine times estimates. Essentially Peck predicts Twitter will trade at 60 times 2015 earnings estimates of 25 cents per share, which is a tall order considering Twitter is now suffering from user monetization issues. 

In his research note, Peck grouped Twitter in with Google (GOOG), Amazon (AMZN) and LinkedIn (LNKD), while suggesting that Twitter "has a long runway in its core business." As evident by the swift exit of the company's pre-IPO shareholders, they lack the confidence in these projections.

I think it's a mistake for investors to put too much credence in this recent target absent clear signs that management can turn this utility into an actual cash-generating machine. 

Bulls will argue the results weren't all bad. The company delivered revenue that was higher 119% year over year, easily beating analysts' expectations of a loss of 3 cents per share on revenue of $241 million. But revenue has never been the problem. Getting users to become and remain interested is the biggest challenge.

Until management figures out ways to turn this utility into a necessity, Twitter will continue to struggle. I will continue to avoid the stock.

At the time of publication, the author held no position in any of the stocks mentioned.


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

>>Read more: Why Twitter Has More Upside Than Facebook

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