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Want The Real Reason Why Twitter Stocks Are Falling?

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Why Twitter Stocks Are Falling?

Want The Real Reason Why Twitter Stocks Are Falling?

June 25 2015, 08.00am GMT


When a company or their stocks don’t perform, according to investor expectations, there always has to a scapegoat to take the blame.

Twitter (TWTR, -0.57%) stocks are trading at less than its 2013 IPO price and investors looked to CEO Dick Costolo, eventually forcing him to say “the buck stops here” by announcing his resignation on the 11th of June. The company is now casting around for a replacement CEO.

Mark Hulbert, columnist with MarketWatch, asks the question, what if the problem with Twitter was not Costolo, but rather the real challenge is a high price-to-sales ratio? Hulbert feels it’s a matter of simple arithmetic that as a company’s price-to-sales ratio falls, a problem all new public companies face, sales have to grow at an increased rate just to stay even with stock.

The price-to-sales (PRS) ratio can be calculated by dividing the company’s market capitalization by its total annual sales. The theory is that the lower the ratio, the more attractive the investment should be. Put in a different way, the ratio tells you the value the market ascribes to each dollar of the company's sales.

The average PRS for the S&P 500 index (SPX) stands at 1.8 while the company that Twitter would most like to emulate and be compared to, Google, has a current PRS of 5.5. Compare this to the Twitter PRS which stands at 15.5 and you can start answering the question posed by Mark Hulbert. In order to reach a PRS of 5.5, Twitter would need to triple its annual sales again on the back of having already done so in the 18 months since its IPO in 2013.

The replacement needed as a successor to Costolo as CEO of Twitter, will need to be a “Super-Salesman” in addition to all the other qualities required to be the CEO of a company the size of Twitter, in order to keep the investors happy.

The actual conduct of the CEO and the performance of the company are not necessarily inter-related according to Rakesh Khurana, Professor of leadership development at Harvard Business School. Speaking to MarketWatch he said, “Large-scale statistical studies have failed to find any direct causal link between CEOs and firm performance.” Khurana feels that the internal culture of a corporation “exerts a far greater longer-term influence on the company’s success” than a CEO.

Traders can however take advantage of the CEO investor obsession which can drive a price down, by moving in while prices are depressed. Once the new “Wonder Kid” CEO has been appointed, prices will inevitably start climbing and that’s time for traders to sell off.

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