Twitter Shares Slump After Morgan Stanley Downgrade

Monday, 06 Jan 2014 11:52 AM

By Dan Weil

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The shares of microblogging titan Twitter dropped 3.9 percent Monday, after Morgan Stanley analyst Scott Devitt downgraded the stock and set a target price of about half what the stock was trading for.

He cut his rating to underweight, the equivalent of sell, from equal weight, arguing that Facebook and Google are in better positions to attract ads.

"As competition for online ad dollars intensifies, we guide investors to Google and Facebook, dominant platforms with more attractive risk/reward," Devitt wrote in a commentary obtained by Bloomberg. "In our view, success is far from guaranteed at this early stage."

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Twitter ended down $2.71 at $66.29, after trading as low as $63.50. At the closing price, the stock is still 150 percent above its Nov. 6 initial public offering price of $26.

Devitt's target price for Twitter is $33. He said his downgrade was largely based on valuation, Business Insider reports. Twitter trades at much higher valuations than its peers do based on revenue and earnings before interest, taxes, depreciation and amortization (EBITDA), Devitt notes.

"Twitter currently trades at a premium to peers and is above our bull case, which assumes that brands will strongly embrace Twitter’s Amplify TV tie-in product," Devitt wrote, according to Business Insider.

"However, as the competition for online ad revenue intensifies, we see TV ad budgets as most likely to go to the largest distribution platforms such as YouTube [owned by Google] and Facebook first, and then later to smaller platforms including Twitter."

CNBC commentator James Cramer also notes that Twitter's valuation is much higher than Facebook's is. "People are struggling with how to value Twitter," he said. "Twitter is a cult stock."

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