Twitter's stock a sign of tech giddiness

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Posted: Tuesday, December 31, 2013 12:00 am

SAN FRANCISCO — Max Ganik has no doubts that Twitter's stock — which late last week was up 145 percent since it first began trading Nov. 7 — is firmly in bubble territory.

“But that doesn't mean it's going to stop going up,” said Ganik, 16, a junior at a high school in Scarsdale, N.Y., who doubled his money by lunchtime on Thursday trading Twitter stock options. “Traders are going to drive up the price. The valuation doesn't actually matter at this point.”

Ganik is certainly on the young side for a Twitter trader — and as a minor, he needs his mother, Dahlia, to handle the actual trades. But his sentiments help explain the mixture of hope and cynicism that had pushed up Twitter's stock by 76 percent from Dec. 1 through Thursday, then sent the shares plunging 13 percent Friday and an additional 5 percent Monday — all without any changes in the company's prospects.

The rapid rise in Twitter's stock was a sign of the overall giddiness infecting Silicon Valley. Internet stocks have run up sharply this year, exceeding the broad stock market's strong rally. Venture capitalists and angel investors are flush with cash and complain that they are having trouble finding smart places to put it.

Startups like the instant-messaging firm Snapchat, which turned down a buyout offer of nearly $3 billion in November, are remaining independent with hopes of becoming the next Twitter.

“You're starting to hear it: 'It's a new world order.' Apparently the sun is going to rise in the west because of Twitter,” said Timothy Connolly, a New York money manager who teaches classes in investment analysis and posts skeptical tweets about Twitter's stock. “It's absolutely beyond ridiculous.”

Twitter, which has triple-digit revenue growth but no profits, is trading at a much higher valuation than proven Internet powerhouses like Facebook and Google.

The company has released no major news or financial information since its initial public offering. But that has not stopped investors' exuberance about Twitter's potential to eventually bring in billions of dollars from advertising from propelling the shares to nosebleed levels.

Even some of the most bullish analysts who declared the stock a buy before it went public at $26 do not understand why anyone would buy it at current prices.

“I just haven't seen something like this in a long time,” said Robert S. Peck of SunTrust Robinson Humphrey, who had set a price target of $50 before the IPO but cut his rating to hold two weeks ago when shares reached $59. “They don't have earnings. They don't have free cash flow.”

As Barron's, an investment advisory publication, put it over the weekend, “At $45 billion, the company may have the highest market value of any firm that isn't generating any earnings since the dot-com bubble of 1999-2000.”

Analysts say investor expectations for Twitter have become so high that any negative surprise will cause the stock to drop.

One of those negative surprises occurred Friday, when Ben Schachter, an analyst with Macquarie Securities Group, cut his rating on the stock before the market opened, noting: “Nothing has changed in the fundamentals to justify the sharp rise in shares over the past few weeks.”

That was enough to start a stampede among Twitter traders. They dumped the stock all day, and by the end of trading, the shares had dropped $9.56 to close at $63.75. Still, the stock ended the week 6 percent higher than when it began, before giving up 5.1 percent Monday to close at $60.51.

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