Saturday, November 9, 2013

Did Twitter try to fly too high?


What happened last Thursday with the Twitter IPO is still mind boggling to me. It's stock closed 73% higher! I expected the stock to tumble all the way down to the low 30's if not further. Amazingly that didn't happen - making Twitter one of the most bizarre IPO's I've ever seen. I've a feeling traders and investors really bought into the hype of the IPO, but the reality is that Twitter ($TWTR) is losing money everyday and the sales growth is decreasing - hell, they revealed in the IPO documentation that they've never made a profit over the last three years, and they kept losing even more money in the first 9 months of 2013! Do you get it? I certainly don't. Now how on earth can they have a stock price that's in the 40's?! It makes no sense!

The bird's coming down!

Ironically enough, I announced on twitter that I was short this stock - and still am. Around $46 with a $50 stop, squeezing it a bit when the stock was about to touch the $50 mark. But something inside me said that it was a golden opportunity to go short. I think Twitter banked on the fact that a lot of people 'know' about twitter and are 'on' twitter, but the fact of the matter is that twitter has a nonsense business model.

They claim and boast to have over 240 million 'active' users or whatever (this number fluctuates around the internet oddly enough, seems like an important 'detail' to me), but how many of those active users are indeed active, and is not software that sends out automated tweets? I hear no-one talk about that, and as an investor; wouldn't you like to know how many people actually use the company that you invest in? Alright, lets hypothetically say that the number is somewhere around 240 million like they say, they raised well over 4 billion - how many... you do the math.

Proof

Look, it's common sense. As soon as the hype dies down, and traders and investors begin to realize what twitter's actually worth they'll dump the stock in no time to cut their losses. I think in order to trade around the current stock price you need some sort of proof to investors that you can actually make a profit. Enough with the speculation already and show us what you're really worth. Already word goes on Wall Street that the stock has been downgraded.

The chart to the right represents the first two trading days of twitter. Lost a little over 2% the first trading day, more than 7% the second. It's pretty obvious which direction this is heading. It seems to me already investors are coming to their senses. Twitter obviously priced their IPO too high, I thought even their initial price of $20 (and later $26) was far fetched. I think Facebook ($FB) priced it's IPO better than twitter, at least Facebook has something to offer and people use it. Yet their share prices are about the same.

Still a good time to go short?

Like I said earlier, I shorted this stock at $46, so already I'm in the green-zone regardless. But is it still a good idea to short this stock? Absolutely! This is as clear as a bell to me, short this stock while it's still trading in the $40's because it won't be there for very much longer. Short it, while it still very obvious it's too overbought and hyped up. In fact, I expect the stock to tumble next week in the $30 range, yes may even $20's. This is a golden opportunity to make some good money by going short, but make sure you set your stops - just in case it goes the opposite direction (especially with shorts it can be a very dangerous trade if you don't set your stops).

Thank you for reading another Weekend Edition and have a great weekend!

By: +John van der Munnik

Disclaimer:

All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.