Twitter fails to fly after its first earnings report


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Bobby Raines 02/10/2014

Twitter ( TWTR ) was the most talked about initial public offering in 2013. Even though there were larger offerings, such as Plains GP Holdings ( PAGP ), Hilton Worldwide ( HLT ) and Zoetis ( ZTS ), social media company Twitter got almost all of the hype.

That makes sense in that Twitter, as a new technology, has a much bigger potential for growth than any of those other companies. That potential for growth also why Twitter shares traded as high as $74.73 in late December without the company providing any meaningful updates since its shares started trading. Considering that the initial offering price was $26 per share, that's a tremendous appreciation based almost entirely on enthusiasm about the future.

That kind of valuation is hard to maintain without results. Unfortunately for Twitter and its shareholders, results are where it ran into a problem.

The stock had come down to $65.97 before reporting earnings after the close of the market on Feb. 5. And the headline from the earnings report were good. The company's adjusted earnings and revenues were better than expected, but unfortunately, subscriber growth slowed in the most-recent quarter and perhaps more alarmingly, the number of timeline views actually fell.

Traders, spooked by those numbers, sold the stock aggressively the next day. When all was said and done, TWTR closed the first trading session after its first earnings report at $50.02.

I like Twitter. I'm an avid user of the company's product and think it is an incredible tool to communicate with a wide range of people, or to follow events in real time. (Follow me @BRatMICenter ) That said, I'm not sure exactly how popular the service will ever be.

The 140-character limit means there are lots of small posts. The character limit also leads to abbreviations and creative spelling to get your point across in the allotted space. This leads to a stream of tweets that moves quickly and could be incomprehensible to newcomers. This relative opaqueness means it can be hard for new users to figure the service out, while being almost addictive for its real fans.

I don't think Twitter is going to wither and die like some of the first wave of social networks. I think the people who like it really like it, while some people will probably never get it. The company is actually making more money per user than ever before, a trend I would expect to see continue as Twitter and advertisers, figure out how best to reach users. The company also has the potential to a lot of really interesting things with the massive amount of data is has.

How much is the company actually worth? I have no idea. The market doesn't either. The only thing I can tell you about the future when it comes to Twitter's shares is to expected continued volatility.

My feeling is that the stock is going to head lower for a while as investors sour on the stock after being "burned" by this earnings report. It may follow a Facebook ( FB )-like trajectory and wander in the wilderness for a while before eventually hitting new highs.

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Traders may consider a March 57.50/60 bear-call spread. This position returns a 35-cent credit. That's a 16.28% return, or 148.55% on an annualized basis (for comparison purposes only.) This position will return a full profit so long as the stock is below $57.50 at March expiration, giving it about 15% downside protection.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on

This article appears in: Investing Options
Referenced Stocks: TWTR , PAGP , HLT , ZTS , FB

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