Twitter was downgraded to "sell" by Cantor Fitzgerald on Wednesday because of its valuation. However, one strategist says there's another reason not to own the company's shares -- actually, 464 million reasons.
Shares of microblogging giant Twitter fell 2% on Wednesday after Cantor Fitzgerald cut their ratings on the company from "hold" to "sell" based on what they said was excessive valuations.
According to Andy Busch, editor and publisher of The Busch Update, Twitter's valuation has been high relative to comparable companies since its went public at $26 per share on November 7.
"At $26, it was 16.5 times sales and even that was a premium to companies like Facebook, Yelp, and others," says Busch on CNBC's Street Signs' Talking Number segment. "At $74, where it eventually got to, that's three times that. Clearly, that's out of control."
Busch believes that one way Twitter is trying to boost its advertising revenues is by acquiring companies such as mobile ad server MoPub.
Yet there's a very big reason to be wary of Twitter, according to Busch, and that's the amount of additional shares that will be added to the market this year.
"They're ending a lockup period on February 15," says Busch. "There are 9.9 million shares that are going to be available. But, the big one is in May – there are 454 million shares that become available. I think that's why 20 out of 26 analysts who cover Twitter have it either as a hold or a sell."
Trying to analyze Twitter's charts so soon after its IPO is a challenge, according to JC O'Hara, Chief Market Technician at FBN Securities.
"Twitter has only been traded for roughly 42 days so you don't even have enough information to get a true gauge of trend, which is a 50-day moving average," says O'Hara. "But, I will tell you this: The chart right now is on shaky territory. It's run out of support."
O'Hara sees a support line of $58.80, just a few cents below the $59.29 where Twitter closed on Wednesday. The support line also forms the base of a bearish descending triangle, according to O'Hara. However, that doesn't rule out a possible move back up if a test of the support line holds.
"If support acts as support should, we could see a countertrend rally here back up to the $65 - $68 area," says O'Hara. "Again, this is a very difficult chart – a lot of moving pieces to it so I would be cautious here. And, if you are in it, I would be very nimble."
To see the rest of Busch on Twitter's fundamentals and O'Hara on the company's charts, watch the video above.
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