Is Twitter's Stock Overvalued Or Undervalued?

Is Twitter's Stock Overvalued Or Undervalued?

Twitter Inc TWTR shares have lagged the S&P 500 in 2021, generating a year-to-date total return of 12.8%. The stock has gotten hit hard in recent days following disappointing earnings reports from Snap Inc SNAP and Facebook, Inc. FB.

Investors are concerned the same advertising headwinds that are negatively impacting Snap and Facebook’s businesses will hurt Twitter as well, but value investors may be wondering if the sell-off has created a buying opportunity.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 28.7, nearly double its long-term average of 15.9.

Twitter’s PE is currently 132.4, nearly five times the S&P 500 average as a whole. Twitter's PE ratio is also up 452% over the past three years, suggesting the stock is currently priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.6. Twitter’s forward earnings multiple of 50.5 is still more than double the multiple of the S&P 500 as a whole, making Twitter's stock look overvalued.

Twitter’s forward PE ratio is also more than double its communication services sector peers, which are currently averaging a 20.7 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Twitter’s PEG is 3.23, suggesting Twitter is significantly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.12, well above its long-term average of 1.62. Twitter’s PS ratio is 11.7, nearly four times the S&P 500 average as a whole.

Finally, Wall Street analysts do see some value in Twitter stock over the next 12 months. The average analyst price target among the 34 analysts covering Twitter is $74, suggesting about 20.9% upside from current levels.

The Verdict: At its current price, Twitter stock appears to be overvalued based on a sampling of common fundamental valuation metrics.

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