Eric Jackson, founder of Ironfire Capital, says Twitter's relative valuation is right now too high, even using a metric that was a favorite in the dot-com bubble at the turn of the millennium – the price-to-sales ratio.
Investors and analysts use compare the price of shares to the revenue per share when there's not enough earnings history for a company or when forecasts are difficult to determine. While this measure is less volatile than the more popular price-to-earnings ratio, its biggest drawback is that it doesn't give a sense of a company's costs relative to others.
Still, because revenue numbers are tougher to manipulate with clever accounting (though not impossible), price-to-sales ratios can be used to compare companies with short histories. In the case of Twitter, it says a lot about where the market is valuing the company and how optimistic it is about its growth potential. For Jackson, the markets may be too hopeful.
"In the social media world, if you just compare [Twitter] to those others, it's bizarre," says Jackson. "Facebook at the moment is trading 16 times this year's revenues. Yelp – smaller company, growing a little faster – they're trading at 21 times this year's revenues. Yet Twitter is trading for 56 times what they're expected to do this year in revenues. I love the company and I think it should be a great company in the long-term, but not at this price."
So, where does Jackson see Twitter's stock headed next?
"It's definitely, in my view, going to the low-$30s," says Jackson. "There's a chance it could go to the $20s. Even in the $20 range, it still would be pricier than Yelp and Facebook on those metrics."
Jackson says he would buy the stock in the low-$30 range should Twitter's shares get to that level.
But, that doesn't mean Jackson is long-term negative on the stock. In fact, he has a surprising prediction of where shares could end up in 2014 and how he sees it getting there.
To see Jackson's long-term outlook on Twitter, watch the video above.
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