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Will Twitter’s place in the S&P 500 keep its shares buoyant?

Garry White
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Twitter Goes Public On The New York Stock Exchange
Twitter will be included in the S&P 500 from Thursday June 7 (Source: Getty)

Twitter shares hit a three-year high following confirmation it will be added to the US benchmark S&P 500 from June 7. But will it stay in the index for long?

The committee that decides which shares are included in the S&P 500 has given Twitter a very valuable “like”. The shares will be included in the most significant index in the world, forcing trackers and exchange-traded funds to buy the shares. Indeed, index funds tracking the S&P 500 have more than $700bn under management, according to research firm Lipper. Many of these will be buy shares on June 7, raising the possibility of a further bump in its share price.

The news sent the micro-blogging site’s valuation up by 5 per cent and the share hit a three-year high. The space in the index was created by the takeover of Monsanto by Germany’s Bayer. Another tech group, Netflix, will also be added to the S&P 100.

However, whether the group stays in the index will depend on its future share-price performance. Wall Street appears to believe the shares could fall from here. The average price target on the shares by US analysts monitored by Bloomberg is $30.79 a share, some way below the current share price of $39.80, although there may be some adjustments to this target based on the S&P inclusion decision.

The shares have more than doubled from lows seen last year, after chief executive Jack Dorsey unveiled a focus on live video and more personalised content. After more than 16 quarters of losses, there was good news as the company posted its second-straight quarter of profitability earlier this year. The looming World Cup in Russia also provides the potential for video advertisements.

One problem for Wall Street is monthly active user growth had been pretty stagnant and it needs to boost this factor in coming quarters. However, the first quarter of this year saw Twitter add six million new users, ahead of consensus expectations for five million, and revenue growth was 21 per cent year-on-year. However, the shares fell as the guidance for the rest of the year was pretty subdued.

Its S&P inclusion means Mr Dorsey now has to continue to deliver solid growth, especially as the boost by tracker fund purchases will ebb within a few days. The company said in a letter to its shareholders following the numbers that it will be difficult to "match last year's growth rates in the second half of this year, and as a result the pace of revenue gains will more resemble those of 2016”. Unfortunately, that growth was a mere 1 per cent to 2 per cent.

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