(Reuters) - Twitter investors who heeded the advice of high-profile banks such as Goldman Sachs Group and Deutsche Bank to buy the social media company's shares might be kicking themselves.
Much more accurate calls were made by Wells Fargo, Atlantic Equities and Macquarie Research, whose analysts advised clients to get out of the high-flying stock about the time it peaked in December.
On Wednesday the stock fell as low as US$37.24, 50 per cent below its peak of US$74.73 the day after Christmas, wiping almost US$18 billion off Twitter's market capitalization.
The downgrades, and the subsequent swoon by the stock, reflect concern about slowing growth in Twitter's user base and the company's ability to reverse the trend.
Year-on-year growth in the number of Twitter users has fallen for five straight quarters, and the company said on Tuesday that its 255 million monthly users, on average, appeared to check the service less frequently than a year ago.
That in turn has fueled doubts that Twitter could one day attract as many users as Facebook's 1.2 billion, or match its much larger rival's power as an advertising vehicle. It's also raised questions over whether it can sustain growth over the long term.
While no one is suggesting Twitter will lose its consumer cachet as happened to companies such as MySpace or Orkut, neither can anyone guarantee that as tastes change newer rivals won't usurp it.
"Can they become a mainstream company? That's the open question," said Ben Schachter, the Macquarie Securities analyst who downgraded Twitter's stock to "underperform" on Dec 27 - the day after it peaked.
It's a far cry from the enthusiasm that greeted the company when it debuted on the New York Stock Exchange on Nov 7 and its shares soared 73 per cent over the offering price. There was no let-up for the next two months, as the stock scaled fresh highs with little or no news to justify the valuation.
That got some analysts worried. Schachter, speaking to Reuters on Thursday, recalls a "runaway momentum." Starting mid-December, seven brokerages downgraded the stock within a span of three weeks. Wells Fargo and SunTrust Robinson kicked off the first round of downgrades on Dec 16, followed by Atlantic Equities. Macquarie timed its downgrade to perfection.
In his downgrade note on Dec. 16, Wells Fargo analyst Peter Stabler said investors were "underestimating the challenges facing the company".
A common theme was that Twitter, though innovative, well-run and full of potential, simply did not warrant such a rich valuation, so soon. "They are focusing on the right things. I only have positive things to say about the company. My quibble is with the stock," said Brian Wieser, Pivotal Research Group analyst, who was among the first to urge clients to retreat.
He downgraded the stock to "sell" immediately after Twitter's shares jumped on its opening day. At the time, he had a US$30 target price on the stock and recommended selling after they breached the US$45 level in their market debut.