Michael Santoli

Analysts at Twitter's IPO Banks Strike Sober Tone on Stock

Michael Santoli
A person holds a magnifying glass over a computer screen displaying Twitter logos
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A person holds a magnifying glass over a computer screen displaying Twitter logos, in this picture illustration taken in Skopje September 10, 2013. REUTERS/Ognen Teofilovski

Perhaps it’s appropriate that Wall Street has effectively crowd-sourced its outlook for Twitter Inc. (TWTR) as an investment.

With the post-IPO “quiet period” lapsed, analysts at the investment banks that underwrote Twitter’s $2 billion Nov. 6 initial stock offering initiated coverage of the stock Monday. In aggregate, their price targets approximate the stock’s Friday closing price of just below $42.

Lead underwriter Goldman Sachs is recommending clients buy the shares, and applies a $46 price target. Deutsche Bank is the most bullish of the firms weighing in Monday, eyeing a $50 one-year price objective, or 20% above Friday’s finish. J.P. Morgan is “Neutral” with a $40 target. Bank of America Merrill Lynch rates Twitter “Underperform," suggesting $36 is fair value. And Morgan Stanley is lukewarm, citing a “base case” for a proper valuation of $33.

Taken together, this fresh round of initial research works out to an average target of $41 for the stock. As of early afternoon trade on Monday, Twitter shares were trading just above this mark after earlier easing back to $40.40.

This harmony among the brokerage analysts and the market’s real-money estimation of Twitter’s value suggests a few things about the social-media company, its prospects and the business of brokerage-house stock advice today.

The inability, or reluctance, of analysts to torture their spreadsheets to generate more-aggressive upside valuation targets for Twitter tells us the market has already gone a long way toward crediting Twitter for years of great success in growing and monetizing its user base – credit it has yet to fully earn.

The market at first vastly underestimated the success of, say, LinkedIn Corp. (LNKD) in exploiting its network for impressive growth, advertising allure and user stickiness. The stock has quintupled from its $45 IPO price in 2011. With Twitter, the market is front-loading its valuation, now at 18-times forecast 2014 revenues, versus 13-times for (an admittedly more mature) LinkedIn.

The initiation ratings qualify as a rather sober group opinion on the most-hyped and excitedly received IPO of the year. Five years after the financial crisis and a dozen years removed from the analyst conflict-of-interest “scandals,” this remains a chastened analyst community. When a 20% potential gain defines the bullish upper bound among top underwriting banks, we’re a long way from the days when research was shilling for a firm’s bankers.

There is also something relevant here about the current market moment. Stocks have done a good deal better than the average Wall Street handicapper has predicted. Even with a 30% gain in the major indexes this year, enthusiasm for stocks has been grudging, and late, in general.

The social-media sector has soared to stretched, arguably over-generous valuations across the board. The Global X Social Media ETF (SOCL) is up 47% year-to-date; back in September its share count jumped by nearly 35% in just one week. Yet this localized runaway optimism, if that’s what this is, has been driven by growth-starved, dream-chasing investors, not cheerleading analysts.

Indeed, Ryan Detrick of Schaeffer’s Investmetn Research points out that fewer than half of all analyst recommendations on S&P 500 index stocks are Buys, down from more than 55% in late 2011 and nearly 75% at the year-2000 market peak. This is a long-term contrarian bullish signal, showing that professional market sentiment has not gotten over-enthusiastic yet.

The early Facebook Inc. (FB) experience is perhaps instructive in assessing the early burst of Twitter opinion. Famously, the IPO was priced too high for the level of true demand, selling for $38 a share in May 2012 and immediately trading lower.

When in late June 2012 Facebook’s bankers started coverage, the stock was at $33.10 and the average price target was just below the $38 offer price, suggesting 14% upside in a year.

As it happened, Facebook was pressured for months, even dropping below $20 a bit more than a year ago, before surging this summer. It reached the implied one-year target of around $38 in 13 months, surging through that level in early August on its way to the current $46.49.

As a side note, the Twitter deal and aftermath shows that the process of pricing the stock, and opening it on the New York Stock Exchange upon its debut, proved a remarkably fair and so-far stable reflection of true investment demand.

Goldman setting the initial price for the lucky IPO subscribers at $28 was widely derided by hindsight geniuses as too low after the stock opened Nov. 7 at $45.10 and briefly touched $50. Yet the IPO price was set at a reasonable level given prevailing valuations in the industry and inherent uncertainties about the true depth of the demand by long-term holders (See: Facebook debacle).

And opening the stock in an auction near $45 looks to have been a pretty good reflection of where genuine buyers and sellers would settle their differences, given the typical day-one eager bidding and the fact that the stock has traded within a few dollars of that price for nearly a month.

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