Weaknesses in Twitter stocks are mainly due to external forces
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Twitter (NYSE:TWTR) the stock fell sharply from its 13-month highs. From top to bottom, it has lost over 60% of its value.
Source: Worawee Meepian / Shutterstock.com
However, this did not happen due to a break in its fundamental thesis. Most were not his fault.
For months, external factors contributed to the decline. Last year, the meme of selling small-cap stocks took off.
It doesn’t matter that stocks like Twitter have strong businesses, they’ve been put on sale. The whole sector collapsed, Break (NYSE:BREAK), pinterest (NYSE:PINS) and Etsy (NASDAQ:ETSY) also failed. Even big fintech titles like To block (NYSE:SQ) and PayPal (NASDAQ:PYPL) took a hit, despite their excellent fundamentals.
TWTR stock struggles
Twitter showed considerable improvement in its finances. But so far, investors haven’t cared much about it. The sell-off has been relentless and systemic. TWTR stock has even dropped to its pandemic breakout level, and yet it is still struggling.
This makes today’s bullish conclusion simple with one caveat. Owning Twitter this low in the long term is unlikely to be a financial mistake. However, in the short term, there could be more hiccups along the way across all markets.
As long as the indices are in a correction phase, TWTR is threatened by their drag. Markets have yet to regain their footing since the onset of Federal Reserve rate hike jitters. The bears have many strong tailwinds, so the bulls are at a severe disadvantage.
It should last a few more weeks due to two major factors. The first, of course, is the seriousness of the situation in the Ukraine region. The second comes from the fear that the Fed will wage war on inflation. We might get more clarity on that when they meet next week.
Threat of market downturn
Source: Charts from TradingView
Tomorrow we will find out how bad the inflation reading was for February. Some experts expect more than 10%, which could cause panic on Wall Street. The extreme acceleration of inflation in recent times has probably been made worse by the explosion in commodity prices.
Yesterday my fill up cost me $6.50 a gallon in Southern California. After almost a decade of struggles, almost all the goods are suddenly on fire. While the price of oil grabs the headlines, the story spans a wide range. Wheat futures prices, for example, soared 65% in about two weeks.
Investors are already on shaky ground, so they are likely to panic even more over such securities. The timing is bad as the indices are sitting just above their February 24th low. Losing that could result in another 11% correction from there. This would surely have a negative impact on TWTR stock, which is also trying to find an equilibrium around $31 per share. This is the highest volume point in five years, so should provide support.
Buying stocks in this support makes sense. But as these risks loom, investors should start with partial positions, leaving room to add more later. The title excess should force us to be less confident in our convictions.
I’m sure the P&L is showing improvement, but for now I’m worried about the market slowdown. Twitter’s revenue doubled in five years, so they got the benefit of the doubt for that. Its low price-to-sales ratio of 5 indicates that shareholders now have realistic expectations.
Additionally, Twitter now generates over $800 million in positive cash flow from its own operations. This gives them the freedom to execute plans without restrictions from banks. This is an important point as the Federal Reserve is expected to raise rates several times this year.
At the date of publication, Nicolas Chahine did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
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