Michael Kramer and the clients of Mott Capital own GOOGL
Twitter Inc.’s (TWTR) stock crumbled following its third quarter results at the end of October, with shares now 35% off their 2019 highs. The sharp decline leaves the equity up by less than 2% in 2019, well below the S&P 500’s increase of over 24%. However, the stock may be due to rebound by as much as 9% in the coming weeks based on the technical chart and bullish options betting. However, any rebound may only prove to be short-lived.
The company reported earnings of $0.17 per share on October 24, below consensus analysts estimates for $0.20. Additionally, revenue came in at $823.7 million which was well below estimates for $874.03 million. The big hit came when the company guided fourth quarter revenue to a range of $940 million to $1.01 billion, which was less than estimates of $1.06 billion.
TWTR vs. S&P 500
Betting On A Bounce
Despite the negative headlines and the stock’s sharp decline, some traders are betting the stock rebounds. The options for expiration on November 29 saw their open interest levels rise by almost 13,000 contracts on November 15 to a total of almost 15,000. The options trade for roughly $0.30 per contract as of November 15, and for a buyer of the calls to earn a profit, the stock would need to rise to around $30.30. That would be a gain of about 4% from its price of $29.25 on November 15.
Technical Rebound?
Additionally, based on the technical chart the stock may have even further to increase should that option bet prove to be correct. Currently, the stock is rising towards a level of technical resistance at $29.70, and should the stock rise above that price, it may go on to climb to the next major level of resistance at $31.90, a gain of about 9% from its price on November 15. However, should the stock fail to rise over resistance at $29.70, it could face a decline to its next level of support at roughly $27.20.
Twitter technical chart
Cutting Price Targets
Despite the optimism for the short-term, analysts have slashed their price targets for the stock. Following the results, the average analysts' price target for the stock has fallen to $34.80 from $42, a drop of 17%. Additionally, analysts currently estimate that Twitter’s earnings will fall by nearly 60% in 2020 to $0.92 per share from $2.28 per share in 2019. It leaves the equity trading at a pricey 31 times 2020 earnings estimates.
Twitter's average price target
Not Cheap
The valuation is very high when compared to other stocks such as, Facebook Inc. (FB) and Alphabet Inc. (GOOGL), which trade for around 21 and 24 times one-year forward earnings. Additionally, analysts are forecasting Facebook and Alphabet to grow their earnings by 7.5% and by 9%, respectively.
1-year forward PE ratios
It leaves the stock trading at a lofty earnings multiple compared to advertising and social media peers, and that likely puts the stock at risk to continue its decline longer-term. However, despite the bleak outlook for growth, it seems reasonable that the stock could rebound over the short-term.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.
