NEW BEARISH Plays
Twitter, Inc. - TWTR - close: $40.21 change: -1.26
Stop Loss: 43.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Entry on November -- at $---.--
Listed on November 03, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 27.9 million
New Positions: Yes, see below
Why We Like It:
TWTR is considered part of the technology sector. The company runs a micro-blogging, communication platform. Users can express themselves but they're limited to 140 characters. The platform is part of the social media/networking industry, which constantly gets a lot of attention from Wall Street.
TWTR came public with its IPO about one year ago. The stock priced at $26.00 and shares ended their first day of trading (November 7, 2013) at $44.90. It has been a roller coaster ride for the stock price. TWTR almost hit $75.00 in December last year and then fell to $30 by May 2014.
The company has seen incredible growth but even with the growth its valuations fuel a lot of critics.
Their P/E ratio is negative. The stock is trading around 20 times its annual revenues and over 100 times next year's earnings.
The stock's most recent earnings report was October 28th and Wall Street was not happy with the results. Analysts were expecting a profit of $0.01 per share on revenues of $351.59 million. TWTR delivered $0.01 cent, matching estimates, and revenues soared +114.9% to $361 million in the quarter.
TWTR's advertising revenue grew +109% to $320 million from the same quarter a year ago. International revenues were up +176%. With all of this growth and the revenue beat, why did TWTR's stock crash on this report?
The reason is user growth. The company's user growth appears to be slowing down. TWTR's Monthly Active Users (MAUs) hit 284 million in the third quarter. That's an improvement of 13 million from the same quarter a year ago. Wall Street was expecting 285 million MAUs and the whisper number was around 290 million or higher.
The 284 million MAU number is a +4.8% growth rate from the same quarter a year ago. Yet a year ago MAUs were growing +6.4%. The prior quarter Q2 2014 MAUs were growing +5.9%. You can see the concern here. TWTR's valuations are based on extremely strong growth, which is it seeing in its ad revenues, but if users aren't growing then ad revenues will likely stall as well.
Management issued Q4 revenue guidance in the $440-450 million range versus consensus estimates around $448 million. This is another reason traders could have hit the sell button. At least five firms downgraded TWTR following these results.
The stock plunged from the high $40s to low $40s on this earnings report. There has been almost no oversold bounce and now shares are hitting new three-month lows near support at $40.00.
Tonight we are suggesting a trigger to open bearish positions at $39.75. I do want to caution readers that there was a rumor of an activist investors getting involved with TWTR but nothing has been confirmed yet. Should that that story prove to be true it could spark some short covering.
Trigger @ $39.75
- Suggested Positions -
Short TWTR stock @ (trigger)
- (or for more adventurous traders, try this option) -
Buy the DEC $40 PUT (TWTR141220P40) current ask $2.60
Option Format: symbol-year-month-day-call-strike