Twitter Stock Up 26% Today – Time to Buy TWTR Stock?

The price of Twitter stock is going up 26% in pre-market stock trading action this morning following news that the founder of Tesla and SpaceX, Elon Musk, owns a sizable stake in the social media company.

Musk’s stake in the company was disclosed this morning as part of a regulatory filing with the US Securities and Exchanges Commission (SEC). The billionaire owns a total of 73,486,938 shares, which results in a 9.2% stake in the company founded and formerly headed by Jack Dorsey.

Based on Twitter’s last Friday’s closing price, Musk’s Twitter stake would be valued at around $2.9 billion, making him one of the company’s most prominent individual shareholders.

His potential influence on the company’s direction either via the Annual Stockholders Meeting or through the appointment of people within Twitter’s Board of Directors is perhaps the reason why investors are reacting positively to the news this morning.

Musk is well known for being an active user of the popular social media platform and he has criticized in the past how the management has dealt with certain controversial aspects of the network such as fake news or the vetting of certain characters to make the community safer for the public.

The CEO of Tesla (TSLA) has not made an official comment about his position on Twitter just yet.

What could be expected from this social media stock in light of this interesting development? In this article, I’ll be assessing the price action and fundamentals of Twitter stock to outline plausible scenarios for the future.

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Twitter Stock – Technical Analysis

The price of Twitter stock has declined sharply since October last year back when the company released its financial results covering the third quarter of the 2021 fiscal year.

Back then, the stock went down nearly 11% as the company’s losses accelerated way beyond the market’s expectations while the management’s guidance for this year came in slightly below the market’s forecasts as well.

A few months ago, Twitter (TWTR) appointed a new Chief Executive Officer – Parag Agrawal – as Jack Dorsey decided to step down as the head of the social media platform.

Until last Friday, Twitter stock was down 9% for the year as negative market sentiment amid expected changes in macro conditions and geopolitical tensions pushed the valuation of tech stocks lower.

However, if this morning’s pre-market uptick materializes during the live session, Twitter stock will swing to positive performance, possibly delivering year-to-date gains of up to 24% depending on where the price lands.

This will also result in a break above the $44.5 horizontal support highlighted in the chart although the stock will remain below its 200-day simple moving average.

Momentum indicators were favoring a bullish short-term outlook for Twitter stock before today’s news as well as the Relative Strength Index (RSI) was climbing to its highest level since July last year while the MACD also moved to positive territory while standing above the signal line.

Moving forward, a break above the 200-day SMA may favor a mid-term bullish outlook for Twitter stock. For now, if the price moves to tag this threshold in the following session, that would result in a total 32.6% upside potential on short notice.

Twitter Stock – Fundamental Analysis

Twitter’s revenues in 2021 surged nearly 37% compared to the previous year while its operating losses were significantly trimmed from $1.14 billion in 2020 to $221.4 million.

Last year’s growth was exceptional and it overturned the downtrend that the company’s sales had been experiencing in the preceding periods.

However, the management did not share guidance for the entire 2022 fiscal year and that possibly rattled market participants as it indicates that they don’t have enough visibility about what’s coming.

The introduction of privacy protection tools by Apple in its iOS devices is one of the most challenging situations that Twitter has to overcome as this feature can affect the app’s data collection and tracking ability.

In this regard, the management recently stated: “The impact of ATT [App Tracking Transparency] is likely to vary across ad platforms given the unique mix of ad formats, signal, and remediations on each, as well as other factors”.

Based on the market’s forecasted revenues for Twitter for 2022, the company was trading at 5.2 times its expected sales for the year by the end of last week. However, if this pre-market uptick materializes in the live session, that metric would jump to around 6.6x.

Considering Twitter’s volatile – mostly negative – earnings and cash flow generation capacity, the market continues to be pricing that the business will experience a significant improvement in its top-line results in the following years.

These expectations have not turned out to be true in the past and there are no indications that they will materialize in the near future either. Moreover, the extent to which Elon Musk can influence the management team to the point that the fundamentals of Twitter are materially affected is unclear.

With this in mind, Twitter’s valuation seems stretched and today’s news-driven uptick might end up fading progressively if long-term holders decide to cash out of their positions.

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