Goldman Sachs boosted its share price target this morning for Twitter, a company that it helped go public as its lead underwriter. Goldman raised its price target a whopping 41.3 percent to $65 from a prior estimate of $46.
That change sent Twitter up as much as 4 percent today, to a share price of around $59. Twitter’s stock has been incredibly volatile of late, bouncing as much as 5 percent on a daily basis, as investors come to terms with its rich valuation ahead of its first earnings report as a public company.
There is much dissension as to just what Twitter’s real value is, and whether it’s reflected in its share price. The bearish case on Twitter’s stock is simple to understand. As Morgan Stanley’s Scott Devitt pointed out earlier this month when he downgraded the stock, Twitter’s multiples when compared to market analogues are quite rich. Devitt has a price target on Twitter of $33.
As we’ve noted previously, Twitter investors are betting that its first earnings report as a public firm will be a corker, showing large revenue growth, and potentially improving margins that could point to future profitability.
In its first S-1 filing, Twitter indicated that it could go public for as little as $17 per share. That compares to its current price of nearly $60. The gap between the two explains the position of both the bull and the bear succinctly.
What I think is without doubt is that Twitter’s shares are incredibly at risk for a sharp correction if the company fails to best expectations in its calendar fourth quarter. Twitter will report the results of that period in early February.
With revenues of $168.6 million in its third quarter, analysts currently expect Twitter to deliver $216.53 million in revenue and a sharply smaller $0.03 per share loss in the fourth quarter, according to Yahoo Finance. If Twitter only meets those marks, and shows in-line user expansion, investors could begin to doubt that it will grow at a pace worthy of valuing it more highly than its traditional rivals. If you would like a textbook case of a company once valued at implied high revenue growth rates, Groupon is a decent precedent.
That Goldman raised its Twitter target is perhaps not too surprising. But also important to note is the mere $5 gap between the new target price and the company’s current share price. A five-buck delta ain’t much heading into your freshman earnings report.
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