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Today's Earnings Prove That Twitter (NYSE: TWTR) Stock Is Overhyped and Overvalued

Today (Wednesday), Twitter (NYSE: TWTR) beat estimates in its first-ever earnings as a publicly traded company.

Its earnings per share (EPS) of $0.02 topped Wall Street estimates by $0.03, and a revenue of $243 million beat projections by $26.14 million, constituting a 116% increase compared to the same period last year.

Twitter's advertising revenue, which makes up 90% of the company's total revenue, came in at $220 million, an increase of 121% year over year; mobile advertising revenue was more than 75% of total advertising revenue.

The good news ends there.

TWTR stock fell $8.72 per share (13.22%) in after-hours trading as of 4:30 p.m. EST.

UPDATE: A dramatic Twitter stock selloff is still underway, as the stock closed yesterday at $65.97 and opened today (Thursday) at $50.61 – a 30.35% drop. Right now, TWTR stock sits at $51.98, still a 21.21% decline.

Here's why the market is reacting so negatively to Twitter's Q4 earnings.

Twitter (TWTR): Not a Long-Term Win for Investors

The fundamentals of Twitter simply aren't solid.

The social media freshman reported a fourth-quarter loss of $511.47 million, or $1.41 per share, compared with a loss of $8.71 million, or $0.07 per share, in the year-earlier period.

Also troubling were numbers surrounding Twitter's "timeline views" – the company has said that ad revenue per timeline view is one of the "key metrics" it uses to appraise the health of its business. Timeline views are a measure of user engagement, and Twitter uses ad revenue per timeline view to track its capacity to make money from that particular engagement.

Today's Q4 showed that timeline views fell 7% since last quarter to $148 billion. On a year-to-year basis, views were up 26%, but the pace substantially declined since Q3's 50%.

In an appearance on FOX Business' "Varney & Co." Dec. 30, Money Morning Chief Investment Strategist Keith Fitz-Gerald said he thinks Twitter's stock price is overvalued.

"Customers are leaving in droves, you've got a complex thing they can't monetize, and the next best thing is a click away," Fitz-Gerald said.

The main question investors buying Twitter stock should be asking is, how will Twitter make money?

And the answer isn't pretty…

Twitter's got a 241 million a day user base – compare this to Facebook (Nasdaq: FB), which has over 1 billion. The customer base needed to support the advertising that everybody thinks is going to propel Twitter stock just may not exist.

"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 October.

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.

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 not sold on Twitter.

With record market highs like we've been seeing, there are much better places to put your money – like these stocks…

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  1. H. Craig Bradley | February 6, 2014

    THE AD MAN

    The very same concerns and market reaction also accompanied Facebook following its May 2012 IPO. It went down from there until it gapped-up on July 26, 2013. Facebook has continued upward since then. Many still remain doubtful of Facebook's sustainable path to profits. Its still not widely regarded as a real business with real products. Its just an online advertiser.

  2. H. Craig Bradley | February 6, 2014

    WHERE IS LAWRENCE WELK ?

    Viewers are migrating away from Social Media companies like Twitter and to online messaging services such as " What's Up?" is a new trend among young users . Like Keith said, another avenue exists just a click away from "active users". The whole idea of monetizing viewers appears to me to be an (overly) complex con game on both investors and advertisers. ( The flag is "complex" rather than simple to understand, one of Warren Buffet's basic investment requirements). The whole social media space seems reminiscent of the dot.com era ( sic "Bubble").

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