Twitter (NYSE: TWTR) stock took a 13% plunge on Friday in its biggest one-day drop since it went public on Nov. 7, a blip that should warn investors of bad things to come for the over-hyped social media sweetheart.
A downgrade to "Sell" by Macquarie Equity research analyst Ben Schachter on Friday was the likely culprit. The stock opened at $72 per share and closed at $63.75.
"Nothing has changed in the fundamentals to justify the sharp rise," Schachter told clients.
Schachter is referring to TWTR stock's dramatic thrill ride since it went public. Twitter priced its IPO at $26 per share and nearly doubled in trading on its Nov. 7 debut. It ended the day with a 72.7% jump to $44.90 per share. The frenzy drove the seven-year-old microblogging company's market cap to $25 billion.
December has been another winning month for Twitter. Shares zoomed from $40.78 per share on Dec. 2, to $60.01 per share on Dec. 20, for a 47% rise.
Then last week happened.
It seemed like a merry Christmas for Twitter stock, which went up 22% from Monday to Thursday during shortened holiday trading hours. Additionally, 82.7 million shares were exchanged, making Thursday the stock's busiest day of trading since its IPO.
But another record was set with Friday's 13% plunge - Twitter stock's biggest one-day drop since its IPO.
Besides Schachter's downgrade, S&P Capital Scott Kessler reiterated his "Sell" rating, stating that the stock was still overvalued.
We agree.
"I think the stock has a hard time being $40," Money Morning Chief Investment Strategist Keith Fitz-Gerald said in an appearance today (Monday) on FOX Business' "Varney & Co." "Customers are leaving in droves, you've got a complex thing they can't monetize, and the next best thing is a click away."
On the week, Twitter ended up with a 6.2% gain. TWTR is down 3.4% in trading today, at $61.56.
With this bull market growing ever long in the tooth, it's just as important to know which stocks to avoid as which ones to buy - and we're still not sold on Twitter.
What to Consider Before Investing in Twitter Stock
The main question for investors who will consider investing in Twitter stock is this: How will Twitter make money? The answer - and execution - will make or break Twitter stock.
"Twitter hasn't shown any profit potential. [It] may make a fine trading instrument, as long as the party continues, but as an investment? You can #countmeout," Fitz-Gerald wrote in an October piece.
The fundamentals of Twitter are simply not solid. Twitter's gross revenue is slowing, up only 6.1% in Q3 2013 from a year ago versus 10.6% in 2012 and 17.1% in 2011.
Meanwhile, net losses are also growing. The company reported a net loss of $133.9 million Q3 2013 versus a loss of $70.7 million in Q3 2012.
It's got a shoddy 232 million a day user base (compared to Facebook (Nasdaq: FB), which is more than 1 billion). The customer base needed to support the advertising that everybody thinks is going to propel Twitter stock just may not exist.
Instead, what drove TWTR stock so high was speculation and hype.
"Traders don't want to miss the run-up when investors recognize potential," Money Morning Capital Wave Strategist Shah Gilani commented when TWTR was trading around $50. "However, they've pushed it up in a momentum frenzy, and we all know what goes up, must come down."
A disciplined trader may see some quick profits from Twitter stock, but Fitz-Gerald recommends investors stay away - there is no long-term potential here.
Besides, there are much better places to put your money to profit from the record market highs we've been seeing.
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