Twitter shares slipped on Monday after some of the five lead underwriters of its initial public offering said the social media firm may not achieve Facebook-like scale and its stock may not rise much higher.

In their first research reports since the November IPO, only Deutsche Bank and Goldman Sachs recommended buying the stock. Morgan Stanley and JP Morgan issued the equivalent of “hold” ratings. One analyst, Justin Post of Bank of America Merrill Lynch, initiated coverage with a sell rating and valued shares at US$36 ($44), according to theflyonthewall.com.

Twitter shares dipped 1.3 per cent to US$41 on Monday. After an explosive debut on November 7, when shares closed more than 70 per cent above the US$26 IPO price, Twitter has churned for weeks in the low US$40s.

At US$41, the San Francisco-based company still trades at roughly 20 times estimated 2014 revenues, a multiple that dwarfs that of social media peers like Facebook and LinkedIn at roughly 11 and 17.6 times, respectively.

Firms that played a role in the IPO were not allowed to issue recommendations on the stock during a three-week span following the IPO known as the “quiet period”.

Their projections, published on Monday, added little clarity to the debate over a fast-growing but still unprofitable company that has divided opinion on Wall Street.

Twitter’s IPO was easily the most highly anticipated technology offering since Facebook’s in 2012. Some on Wall Street have questioned whether Twitter will ever gain the same kind of vast user base Google and Facebook have relied on to grow their businesses.

“The biggest unknown is that TWTR may be a niche product and won’t break through to the mainstream, and may never see MAUs up near the 1B+ levels of mega-platforms like GOOG and FB,” Deutsche Bank analyst Ross Sandler wrote in reference to the more than one billion users of both Facebook and Google. Sandler, the most bullish of the five analysts who kicked off coverage on Monday, put a US$50 price target on the stock.

Although Twitter has rapidly revved up its revenue engine in the past year, investors are counting on it to continue delivering significant top-line gains. The company said last month that revenue in the third quarter more than doubled from a year ago to US$168.6 million.

Goldman Sachs analysts led by Heath Terry saw “substantial opportunity” for growth acceleration even above Twitter’s current pace as it expands internationally, thus justifying Goldman’s US$46 price target.

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Goldman was the lead underwriter on Twitter’s IPO.

“While competition for users’ time is fierce and Twitter’s growth trajectory is unlikely to be linear, we believe these revisions will, over time, justify considerable upside beyond the share current price and valuation,” Terry wrote.

Eight out of 22 analysts so far issued a hold rating on Twitter, while nine recommended “buy” and 5 “sell,” according to Thomson Reuters data.

JP Morgan analyst Doug Anmuth, who valued shares at US$40, warned that the stock was priced at a “significant premium” to Facebook and LinkedIn.

He said, however, that the fundamentals of Twitter’s business appeared promising. Twitter, which has so far pinned its business model on real-time, brand advertising campaigns that accompany television programmes, has yet to tap into smaller businesses that want to buy ads themselves or monetise its popular video-sharing app Vine.

“We look for new initiatives like Twitter Cards and Twitter Amplify to be strong growth drivers,” Anmuth said. “We believe there is also strong monetization potential in Twitter’s self-serve platform, retargeting, the MoPub mobile ad exchange, and Vine.”

– Reuters

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