Short-seller targets Twitter because of potential backlash to its data business

Twitter Inc. stock closed down 12% Tuesday, marking a seven-week low after famed short-seller Andrew Left’s Citron Research said it was shorting the name, citing, among other things, the threat of legislative action over the company’s $333 million data-licensing business.

Citron wrote in a blog post Tuesday that this year Twitter’s data-licensing business will generate $400 million — although analysts polled by FactSet say $387 million — and that it represents the fastest-growing segment of the company’s operations (which it is, according to FactSet). U.S. lawmakers would be interested in that level of revenue because Twitter makes the money from selling user data, including from private messages, the Citron blog post said.

Twitter denied Tuesday that it sells direct-message data as part of its data-licensing business and said that public tweets are viewable and searchable by anyone. “This is the power of Twitter,” the company said.

But investors sold shares regardless, and Twitter TWTR, -12.03%  stock closed down more than 12% to $28.07 on heavy volume amid a broad selloff among tech stocks. Shares have gained 17% this year, as the S&P 500 index SPX, -1.73%  has fallen 1%.

Citing a large amount of insider selling, a low short interest and the fact that an acquisition is unlikely in the near term, Citron said the “dynamics are in place to short Twitter.”

GBH Insights head of technology research Daniel Ives told MarketWatch late Tuesday that investors are nervous following the ongoing revelations surrounding Facebook Inc. FB, -4.90%  and the uncertainty the Cambridge Analytica scandal has brought.

“Today’s news [about Twitter] just added gasoline to the fire burning around the social-media names,” Ives said. “Even though Facebook is front and center, there continues to be worry around what regulatory cross hairs are aimed at Twitter and Google.”

Other advertising giants such as Alphabet Inc.’s GOOGL, -4.47% GOOG, -4.57% Google have also come under scrutiny.

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What’s ironic, said Ives about Criton’s move to short the stock, is that until very recently the conventional wisdom was that Twitter’s data business was a disappointment, with early investors, among others, regarding it unfavorably.

But Tuesday, Citron said it is shorting stock because the company’s data business is vastly more successful and profitable than the company’s advertising, which brings in the bulk of an expected $604 million in first-quarter revenue. If analyst models are correct for 2018 — Twitter missed expectations of $95 million for fourth-quarter data-licensing sales, logging $87 million — the data business is set to grow by 15%, compared to advertising, which will grow at just less than 10%.

It’s less clear what, if any, changes are coming that may affect the data licensing, though Ives said that it’s likely there will be some oversight and policy changes but nothing that will overwhelm tech firms. “I think we’re going to fall short of the financial-services type of regulation for tech stocks,” he said.

See also: Twitter admits to overstating users for years