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Why Twitter Was Downgraded (Update 2)

Tickers in this article: TWTR

Updated from 10:36 a.m. EST to include additional analyst comments in the third and fourth paragraphs.

NEW YORK ( TheStreet) --  Twitter shares fell 4.6% to $56.29 in early Monday trading after Wells Fargo downgraded shares to "underperform" with a $36 to $39 price target, as investors may be underestimating some big risks associated with the company.

Wells Fargo analyst Peter Stabler downgraded shares based on several risks that may be overlooked, including "widely varying degrees of consumer engagement, discounting of engagement metrics/high costs, potential challenges to rapid adoption of TV related products, and amplification risk associated with marketer mis-steps using the platform."

SunTrust analyst Robert Peck also downgraded shares of Twitter, saying valuation is now "stretched," as the stock trades at exceptionally 2014 revenue and EBITDA multiples. "On consensus 2014 revenue and EBITDA estimates, it trades at 36x and 295x (34x and 235x based off of our estimates)," Peck wrote in the note. "On 2015 consensus, the company still trades at significant premiums, at 23x and 125x (over 20x and 113x our estimate)."

Peck rates Twitter "neutral" with a $50 price target.

Shares of Twitter have had a remarkable run in the most recent couple of weeks, following its initial public offering. Shares neared $60 last week, gapping up more than 30% as several analysts raised their price targets on the micro-blogging social network.

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Wells Fargo's Stabler noted that Twitter allows third parties to access its users data, including some highly lucrative partnerships with companies such as Bloomberg. However, given Twitter's relatively small user base, just over 240 million, compared to Facebook , it's easier to see who has tweeted and who hasn't in the past 30 days. Stabler noted that roughly half of Twitter's monthly active users (MAUs) have not tweeted in the past 30 days.

There's the chance that Twitter's MAU user number doesn't accurately reflect the advertising opportunity, given the nature of so many users consuming content, and yet not actively tweeting. "We, ourselves, seldom tweet yet consume content on the platform on a daily basis," Stabler wrote in the note. "However, from an advertiser's perspective, we believe the number of active Tweeters is highly relevant due to the fact that we believe the "retweet" is the single most-valuable form of engagement currently offered by the Twitter platform, much like we believe a "share" is the most highly valued form of social action on the Facebook platform."

These types of users have value, "[b]ut it terms of user engagement, retweeters comprise a far more critical constituency, and conversations with marketers lead us to believe that advertisers will frequently prioritize some engagement actions over others when measuring the effectiveness of their programs," the analyst wrote.