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Time to throw out Twitter

Twitter is absurdly overvalued and vulnerable to the social-media backlash, says Matthew Partridge.

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Russian propaganda has caused a backlash

Twitter is absurdly overvalued and vulnerable to the social-media backlash.

The last year has seen a mounting backlash against social media. Abusive messages, political manipulation by various shadowy entities and a feeling that these websites are taking up too much of our time have all fuelled concern. Yet shares in Twitter have done very well over the past year, rising from $17 to $48 a return of 183%. However, investors in President Trump's favourite social network saw the stock fall after disappointing earnings figures at the end of July, leaving it back where it was six months ago.

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Twitter's poor results aren't the only sign that we may be getting close to "peak social media". Facebook recently experienced its first quarterly drop in European users, while its US figures were essentially flat. Snapchat recently had to revisit a controversial redesign of its platform after users frustrated by the changes deserted it. Moreover, many social-media users may not be genuine. Twitter has closed down 70 million suspicious accounts in just a few weeks.

Advertising to robots

Coverage has focused on the political implications of these fake accounts, but the commercial implications are more pertinent. Why should advertisers spend time and money on these networks if they are just reaching a lot of automated accounts? There is already evidence that some companies are starting to rethink their marketing strategies, and are considering cutting back on digital advertising in favour of more traditional approaches, such as print and television.

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Of course, this isn't the first time that we've sounded a warning about social-media stocks. Last September we recommended that you short Facebook, a bet that went wrong. Still, we're more confident about Twitter. Firstly, the backlash against social media has gathered momentum. What's more, Twitter is particularly vulnerable because it is so high valued, trading at a whopping 45 times 2019 earnings.

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While we would still contend that Facebook is overvalued, compared with Twitter it looks almost reasonably priced, as it now trades at a much smaller 18 times next year's profits. Even if you compare the two using sales, rather than profits, Twitter looks more overpriced since it trades at7.9 times 2019 sales, compared with 4.5 times for Facebook. Twitter's upside also looks limited, as even if users don't vote with their feet, it may still struggle to produce figures that justify its heightened valuations.

Analysts expect Twitter's annual sales growth over the next two years to be around 10%-13%, much lower than Facebook's 20%-25%. Taking all these factors into account, I'd recommend shorting Twitter with IG Index at the current price of $34.19 at £100 per $1. I'd set a stop-loss of $42.73. This means that your potential maximum downside on the trade will be £854.

How my tips have fared

In the last three weeks five of our open long positions rose, while three declined. IG Group increased to 907p (from 870.5p), Redrow went up to 549p (from 528p), Next increased to £55.54 (from £55.46), Shire is now selling for £45.65 (from £44.32), and Premier is 121p (from 119p).

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By contrast, Greene King fell slightly to 481p (from 482p), while Wizz was the worst performer, slipping from £33.84 to £32.58. While Micron is now trading at $51.82, it earlier fell below our adjusted stop-loss of £50 before rebounding, so it was automatically closed out, giving us a small profit of £50.

Our shorts have been more of a mixed bag. With Elon Musk's plans to take the company private at $420 seemingly on hold, Tesla's price has fallen to $315.44. This vindicates our decision to hang on after news of the supposed bid was first made public. However, since Tesla is still trading above the $283 it cost when we first recommended shorting it, we are still making a loss of £130.

The price of Bitcoin, meanwhile, has risen to $7,058, reducing our profits on the trade to £1,042. Netflix, which we tipped two weeks ago, has risen from $337 to $363, which means we are losing £195. Our profits on our short positions have fallen from £1,003 to £717, while our remaining long positions are making a minor loss of £35.80. If you add the two up, we are making an overall profit of £681.20. Since we closed out the Micron trade I'm happy to keep all our other positions open. However, I'm increasing the stop-loss on IG Group to 850p, because we've now held it for over a year. I'm also reducing the price at which we cover our Bitcoin short to $8,500, in order to increase the amount of profit that we are locking in.

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