The Danger in Investing in Twitter

With the hot new IPO Twitter, Inc. TWTR hitting the market, everyone is going nuts trying to figure out if this is the buy of the century, or an over-hyped stock.

There are some in the media who are talking about buying the stock and holding it for several years. This is where I have a problem.

I'll be blunt, the stock has more than fully priced any potential growth for the next few years. It has a market cap of over $23 billion, with no earnings.

Think of it this way, Twitter trades at almost half the value of Costco Corp. COST. Let me ask you, which one has a higher probability of being around in 10, 15, 20 years? I think the answer is obvious.

But you might be saying, Joel you can't compare Twitter which is a fast growing company to Costco. You're right, I did not intend to compare businesses, since they're different, but to show you just how much Twitter's market value has risen.

Let's compare Twitter to some internet stocks, like Facebook Inc. FB. Facebook, which does actually generate profits, trades at 16 times sales and 8.7 times book value. Twitter trades at 42.7 times sales and 27.9 times book value.

The valuation is basically off the charts, even when being compared to a high-flying tech stock.

Twitter would need to grow revenue (and eventually earnings) at this massive rate for years on end to simply grow into its current price!

This is assuming that they can actually continue to put more ads on their service without pissing people off. This also assumes that more users will continue to move to the service without any other competition over the next 5-10 years. These are a lot of 'ifs'.

Look, Twitter is a great company and I wish them well. What I'm worried about is the average investor who thinks the stock is a 'great buy' at this level. With the market cap at $23 billion, what's the upside? The only upside is if another company bought them out. But with the market value so high, this is now becoming a hurdle.

What internet-related stock do I like?  

There is one company that I believe is extremely cheap and has a lot of room to move up. Click here to find out in Profit Behind the Blog.

By Joel Laceda - November 13, 2013 BehindWallStreet.com