Twitter Stock Boom Fading

Stock drops after surging, showing speculation on company's future.

Specialist Glenn Carell, who will handle the Twitter IPO, works at his post on the floor of the New York Stock Exchange, Thursday, Nov. 7, 2013.
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Twitter's stock has nearly tripled in price since its initial public offering in November before falling from sky-high prices on Monday, reflecting the bets investors are willing to make on a company that has never generated a profit but also the volatility of new-age tech investments.

The company's stock closed at $73.31 on Dec. 26 as part of a five-day price surge, even though the social media site had not released any financial news since its IPO to spur investor excitement. That rally ended the next day when the stock closed at $63.75, following an assessment by Macquarie Capital investment bank that said the share price was rising too fast. That decline continued on Monday as the shares trade at $61.69 as of 2:20 p.m.

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Many analysts have viewed Twitter stock as overvalued since the company went public in November, when it started trading at $45.10, exceeding the $26 price set by the company. Twitter's stock may be set to stabilize above that IPO price as Ben Schachter, the analyst at Macquarie Capital who wrote the report downgrading the stock last week, gave the company's shares a 12-month price target of $46, adding that the "company has a bright future and many opportunities ahead."

Investors are betting that Twitter will use money from its IPO to continue developing its service to become profitable during the next couple of years. Twitter is growing fast, having reported $254 million in revenue for the first six months of 2013, compared with $122.3 million generated during the same period in 2012. However, Twitter reported a net loss of $79 million in 2012, so the company is looking for new ways to monetize its more than 200 million monthly active users.

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The micro blog is enjoying speculation in its future, but people should be careful not to draw broad conclusions about other tech stocks based on the performance of Twitter's shares, says Brian Wieser, an analyst at Pivotal Research.

"It has very little to do with the broader market," Wieser says. "It is going to be a volatile stock since there is not going to be common agreement on either what the business prospects are and what the risk profile is to get to those business prospects." Facebook was also criticized for having an overvalued stock after it went public in May 2012 at $38, leading its share price to slump before rising above that IPO price on July 31 of this year. Patient investors in Google and Amazon eventually reaped rewards despite initial skepticism when those companies went public.

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