Tuesday was a bloodbath for Twitter. Early investors and employees rushed to sell shares of the microblogging platform after a customary six-month "lockup" period on their equity expired in the morning. Twitter's stock slumped a stunning 17.8 percent to close at an all-time low of $31.85 on trading volume more than 10 times the daily average, slashing nearly $4 billion off the company’s market cap in a single session.
Though it's doubtful they predicted such a devastating collapse, there were signs that Twitter’s top executives knew bad news was coming. In a bid to reassure nervous investors and signal their long-term faith in the firm, Twitter co-founders Jack Dorsey and Evan Williams and CEO Dick Costolo pledged to hang onto their shares come May 6 in an April 14 securities filing. The move received a fair bit of press and may have convinced a few shareholders not to sell. But that was before a disappointing first-quarter earnings report prompted a whole new round of concern about the company and its stock.
Wall Street’s reaction to Twitter’s lockup expiration differed sharply from the response to Facebook’s in late 2012. Facebook shares soared nearly 13 percent after some 800 million shares became eligible for trading. One reason floated for the gains was that Facebook’s third-quarter earnings demonstrated increasing profitability on mobile devices, and caused a positive shift in investor sentiment.
Slate’s Will Oremus has argued against comparing Twitter directly to Facebook, noting that one is a social network and the other a social media platform. Because of that, he says, Wall Street should be less focused on Twitter’s so-called growth problem and start measuring its worth by other metrics. But whether they should be or not, investors are judging Twitter by its user-growth figures, which have generated quite a bit of negativity. And on the day of Twitter’s lockup expiration, the comparison is particularly relevant: Just as positive sentiment pushed Facebook higher in 2012, the opposite has sunk Twitter’s shares now.
“With Twitter, all the articles that I read right now say, ‘Twitter is dying,’ ‘No one uses Twitter,’ ‘Twitter can’t grow,’ " explains David Meier, a senior analyst at the Motley Fool who invests in Twitter. Those comments might fly in the face of actual data—Twitter is indeed still growing, if not at an increasing rate—but Meier says the company’s tanking stock prices are the talk of Wall Street. “I don’t know when that sentiment turns,” he adds.
One way to look at Twitter’s plunge is that it's a long overdue return to realistic valuations. Before the day’s session started, its shares were trading at 323 times forward earnings per share, according to data from Thomson Reuters. “The fact that the stock got beaten down is not surprising because I think the run-up based on any metric was out of whack,” says Moshe Cohen, assistant professor of finance and economics at Columbia Business School. “Twitter is a very interesting company, the space is very interesting, but there’s still a significant uncertainty and risk as to how to monetize the platform.”
Of course, it’s important to keep in mind that Twitter is still a very young company, and could recoup its early losses over the long run. But Tuesday’s performance should be a very, very harsh dose of reality for the company's employees and investors.