Twitter Recovers Post Lock-up Expiration Selling Frenzy

Edited by Vani Rao

Stock likely to see progress given company’s strong fundamental

After a highly anticipated Initial Public Offering (IPO) and stock market debut on November 7, 2013, the market is witnessing a radical change in sentiment for shares in microblogging and social networking giant Twitter Inc. (NYSE:TWTR). The company’s IPO, after being oversubscribed 30 times, had raised expectations of healthy returns for investors. However, six months down the line, since the expiration of its lock-up agreement on May 6, 2014, shares of Twitter Inc. have experienced extreme selling pressure.

The expiry of the lock-up agreement, which applied to about 470 million shares, or 82% of Twitter’s equity, catalyzed a wave of selling pressure for the stock held by insiders, venture capitalists, and other investors. Investors used this opportunity to make an exit causing a bearish sentiment, as a result of which more than 130 million shares changed hands on May 6, 2014, nearly 10 times the stock’s three-month average volume.

Twitter’s recent stock performance

On the brighter side, the stock has started to recover from its recent weakness. In the previous six trading sessions post the lock-up end, the stock has recovered from its 52-week low of $29.51 recorded on May 7, 2014, to its current market price of $32.85, as on May 14, 2014 (as depicted in the graph below).

Source: Bloomberg
Source: Bloomberg

Lock-up expiration: Twitter vs. Facebook

The reaction to Twitter’s lock-up expiry represents a contrasting market sentiment, compared to that of Facebook Inc. (NASDAQ:FB). During the trading session on May 6, 2014, Twitter’s stock plunged by 18%, causing an erosion of more than $4 billion of its market value. On the other hand, Facebook’s shares had surged 13% on November 14, 2012, the day of its lock-up expiry of approximately 800 million shares.

Twitter’s Strong Fundamentals Could Usher Recovery in Diminishing Stocks

  • Twitter has been witnessing a positive revenue growth over the previous four quarters (as indicated in the graph below). As a primary fundamental indicator, revenue growth could trigger the stock’s recovery in the near future.
Source: Bloomberg/WSA
Source: Bloomberg/WSA
  •  Furthermore, Twitter as a social networking platform has demonstrated high rates of growth in terms of Monthly Active Users and presents an ideal platform for advertisers to grab eyeballs. The company’s growing user base (shown in the graph below) and its ability to earn ad-revenues can stimulate recovery in its shares.
Source: Bloomberg/WSA
Source: Bloomberg/WSA

Conclusion

Since making its stock market debut in November 2013, Twitter’s stock has witnessed a volatile trend over the previous few months. The recent company events have taken toll on Twitter’s stock and it has diminished by more than 45% from the beginning of 2014 to its current price of $32.85 as on May 14, 2014. Moreover, Twitter’s shares are trading far below their 50-day moving average of $44.43. However, we at WSA believe that stock’s lock-up period and the company’s fundamentals are two distinct concepts and have a little correlation with each other. The current weakness in the stock might be a knee-jerk reaction caused by the expiry of its lock-up period. Given the company’s strong revenue model and growth capabilities, from a fundamental perspective, the stock is expected to rebound from its current market price in the long term.

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