Is Twitter's Stock Overvalued Or Undervalued?

Twitter Inc (NYSE: TWTR) shares have lagged the S&P 500 in 2021, generating a year-to-date total return of 12.8%. The stock has gotten hit hard in recent days following disappointing earnings reports from Snap Inc (NYSE: SNAP) and Facebook, Inc. (NASDAQ: FB).

Investors are concerned the same advertising headwinds that are negatively impacting Snap and Facebook’s businesses will hurt Twitter as well, but value investors may be wondering if the sell-off has created a buying opportunity.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 28.7, nearly double its long-term average of 15.9.

Twitter’s PE is currently 132.4, nearly five times the S&P 500 average as a whole. Twitter's PE ratio is also up 452% over the past three years, suggesting the stock is currently priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.6. Twitter’s forward earnings multiple of 50.5 is still more than double the multiple of the S&P 500 as a whole, making Twitter's stock look overvalued.

Twitter’s forward PE ratio is also more than double its communication services sector peers, which are currently averaging a 20.7 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9; Twitter’s PEG is 3.23, suggesting Twitter is significantly overvalued after accounting for its growth.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.12, well above its long-term average of 1.62. Twitter’s PS ratio is 11.7, nearly four times the S&P 500 average as a whole.

Finally, Wall Street analysts do see some value in Twitter stock over the next 12 months. The average analyst price target among the 34 analysts covering Twitter is $74, suggesting about 20.9% upside from current levels.

The Verdict: At its current price, Twitter stock appears to be overvalued based on a sampling of common fundamental valuation metrics.