What It Would Take for Me to Consider Buying Twitter

TwitterIf you chased and purchased Twitter, Inc. (NYSE/TWTR) at $50.09 on the first day of its initial public offering (IPO), you would already be looking at a paper loss of 15.5% after the company’s stock price fell to $42.32 on Friday morning. For those who chased the stock price of Twitter higher—it was the wrong move.

Twitter was initially priced at $17.00 to $20.00 and was raised when demand became euphoric. Even at $50.00, the company’s stock price was already nearly three times the initial lower range, which is astounding. (Read “2013 IPO Frenzy an Omen for the Stock Market?”)

But just like Facebook, Inc. (NASDAQ/FB), Twitter’s stock price could inevitably head much lower after all of the initial excitement fades and investors realize the company needs to make money.

I wouldn’t be a buyer now at the current stock price; I still wouldn’t be buying the company at $40.00. A decline in the stock price to the mid-$30.00 range may strike my interest, but again, I would likely want to wait until the company’s stock price fell to $30.00 or below before even considering the social media stock. At $20.00, I would seriously look at picking up some shares of Twitter. Some of you may not believe Twitter will sink that much, but just look at what happened to Facebook and Groupon, Inc. (NASDAQ/GRPN) following their strong debuts.

With social media stocks, it comes down to eyeballs—the more, the better. Facebook has about one billion users, so it is intriguing to investors. The company is working hard to monetize its user base via the use of mobile advertising, and it seems to be helping. Twitter must also do the same.

Making money from a service that allows users to send 140-character “tweets” (what I consider essentially a texting service to your followers) will not be easy.

I often tweet for my Daily Profits service, but I just can’t seem to get my head around how Twitter will report revenues, never mind make a profit. There is some advertising inserted among tweets, but I can tell you that I have never clicked on one. It’s going to be difficult for the company to figure out how to make money from its tweeting service.

At this point, unless the stock declines to $30.00 or below, I would not be buying; I would rather stick with Groupon or Facebook

Twitter trades at 46 times (X) its trailing revenues, which is way overvalued, considering Groupon trades at 2.62X and Facebook at 17X. Just this simple comparison should make you think long and hard before jumping in at the current high price.

Twitter is all about potential at this time. If the company can figure out how to make money, buyers will come. But until that happens, I would stay far, far away and enjoy the action from a distance.