Twitter (NYSE: TWTR), Facebook, Inc. (NASDAQ: FB) – Is Twitter stock overvalued or undervalued?
Twitter Inc Stocks (NYSE: TWTR) lagged the S&P 500 in 2021, generating a cumulative total return of 12.8%. The stock has been hit hard in recent days following disappointing earnings reports from Snap Inc (NYSE: SNAP) and Facebook, Inc. (NASDAQ: FB).
Investors fear the same headwinds in advertising that is negatively impacting Snap and Facebook’s business are hurting Twitter as well, but value investors may question whether the sale created a buying opportunity.
Earnings: A price-to-earnings (PE) ratio is one of the most basic fundamental measures to assess the value of a stock. The lower the PE, the higher the value. For comparison, the S&P 500 PE is currently around 28.7, almost double its long-term average of 15.9.
Twitter’s PE is currently 132.4, nearly five times the average for the S&P 500 as a whole. Twitter’s PE ratio is also up 452% over the past three years, suggesting the stock is currently listed at the high end of its historic valuation range.
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Growth: Looking ahead to the next four quarters, the S&P 500 futures PE ratio looks much more reasonable at just 20.6. Twitter’s futures earnings multiple of 50.5 still more than double the multiple of the S&P 500 as a whole, which makes Twitter stock appear to be overvalued.
Twitter’s futures PE ratio is also more than double its peers in the communications services industry, which currently average a futures earnings multiple of 20.7.
However, when it comes to valuing a stock, profits aren’t everything.
Growth rate is also critical for businesses that build their bottom line quickly. The price / earnings / growth ratio (PEG) is a good way to incorporate growth rates into the valuation process. The overall PEG of the S&P 500 is currently around 0.9; Twitter’s PEG is 3.23, which suggests that Twitter is significantly overvalued after factoring in its growth.
The price-to-sales ratio is another important valuation metric, especially for unprofitable companies and growth stocks. The S&P 500’s SP 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 average for the S&P 500 as a whole.
Ultimately, Wall Street analysts see some value in Twitter shares over the next 12 months. The average analyst price target among the 34 analysts covering Twitter is $ 74, which suggests an increase of about 20.9% from current levels.
The verdict: At its current price, Twitter stock appears to be overvalued based on a sample of common fundamental valuation metrics.
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