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Here’s why Twitter has a serious problem

Talking Numbers

Twitter shot up last week only to plunge 20%. Is this a healthy pullback or perhaps sign of a bigger problem?

Early last week, Twitter began taking off, only to drop down again on relatively little news. Was this a healthy pullback or the start of things to come for Twitter?

Opening just above $60 on December 23, Twitter hit its record high of $74.73 the day after Christmas. But, after two analyst reports came out on Friday saying Twitter was overpriced, shares of the microblogging social site lost all of the week's gains. By Monday, shares were again slightly above $60.

Macquarie Equities, in a report titled "Too Far, Too Fast", says, "We expect this to be among the shortest downgrade note you’ve ever read, as nothing fundamentally has changed since our Neutral initiation on Dec. 11, except that shares have risen 40%." Macquarie has a $46 price target on Twitter.

Meanwhile, S&P Capital IQ reiterated its sell rating on the company, though it raised its 12-month price target from $30 to $43.

(Watch: Twitter stock caught up in 'some kind of mania': Pro)

From a technical analysis point of view, analyzing Twitter may be tough at this point, according to CNBC contributor Andrew Busch, editor and publisher of The Busch Update.

"Obviously, with the IPO happening relatively a short period of time ago, you don't really get the capability of looking at the daily basis on the chart," says Busch. Nonetheless, he sees it has recently reached the top and then broke through the bottom of an upward trend channel. He sees support at a previous resistance, $53.85 per share.

CNBC contributor Gina Sanchez, founder of Chantico Global, says Twitter is tough to value because it has no earnings and none are expected in the coming year. However, what may be moving Twitter's stock at the moment has more to do with the amount of shares on the market relative to the total shares outstanding.

"One of the reasons that we've seen such momentum in Twitter really has to do with the fact that there are just way too many buyers and not enough sellers," says Sanchez. "They just didn't float enough Twitter stock on to the market… This really is a supply and demand story more than a fundamental story right now."

(See: CNBC's Social Media coverage)

Sanchez believes the stock should be valued in a range $40 to $46, especially when compared to other tech companies.

Twitter Facebook LinkedIn Apple Google
Market cap $33b $132.4b $25.7b $497.2b $371.2b
Forward P/E NA 48x NA 13.1x 21.4x
Revenues (ttm) $534m $6.9b $1.4b $169.4b $57.4b
Price/Sales 65x 19.8x 18.7x 3x 6.5x
Shares Outstanding 544.7m 2.45b 119.4m 899.7m 334.09m
Float 284.36m 1.67b 100.74m 908.1m 276.03m
Float/Outstanding 52.2% 68.2% 84.4% 100.9% 82.6%

Busch agrees with Sanchez that the float of Twitter shares is one of the main things affecting the stock price.

"If you go back to the tech boom in the 1990s, this was one of the biggest problems," says Busch. "Stocks took off [but] you didn't get a chance to buy them because the float was so small; they almost baked it in the cake that their stock was going to soar until the insiders started selling more, people started sell, and then we came off really aggressively."

"See how much more [Twitter] stock will come on the market," says Busch. "Then the thing will calm down a little but you get a better sense of what it can really do."

To see more of Busch and Sanchez analyze Twitter, watch the video above.

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