When Twitter (TWTR) shares soared 73 percent during their 2013 initial public offering, financier and investment advisor Steve Rattner mused about the clamor to own a piece of the microblogging site: "We are officially in another tech bubble."
The sharp fall in the company's share price since since then has proven him correct. In a bright red flag for investors, Twitter shares closed Friday at $25.87, below the IPO price of $26. The stock price has slumped 30 percent over the past month and is well off a 52-week high of $55.90.
"Twitter was overvalued when it went public," Rattner said in an email. "Since then, the company has underperformed, which is a large part of why the stock is down so much. For Twitter to become something more than a niche service, it must -- firstand foremost -- grow users, which have been almost flat."
Not that Wall Street has thrown in the towel on the company just yet. Analysts have an average 52-week price target on the stock of $39.82, about a 53 percent upside from where it currently trades. Still, skepticism abounds even among Twitter's admirers.
In a recent report, SunTrust Robertson analyst Robert Peck says he is "cautiously optimistic" about Twitter's long-term prospects, noting that it is introducing new products and working to better target advertisers. But he predicts a tough road ahead.
"[I]n the short-term given recent challenges, we think investors have labeled Twitter a 'prove it' story," writes Peck, who rates the stock as neutral. "Execution on product rollouts and their ultimate effectiveness in growing [monthly active users]/engagement will remain paramount. "
Twitter's monthly user base hit 304 million in the second quarter. Although that a 12 percent increase year-over-year, it is the smallest gain in at least nine quarters.
Twitter pales in comparison with Facebook (FB), which has more than 1 billion monthly users. Twitter investors became unnerved during the company's latest earnings conference call by comments by Twitter's well-regarded chief financial officer, Anthony Noto, that "meaningful growth" won't come until the company reaches market acceptance. That is likely to "take a considerable period of time," he said.
Barclays analyst Paul Vogel, who has a neutral rating on Twitter's stock, saying in a client note that Noto's remarks were "the big negative in the quarter... placing a cloud on what otherwise was a slightly better-than-expected report."
Turmoil in Twitter's management ranks has also raised eyebrows. The company is on the hunt for its fourth chief executive in its short history after the departure of Dick Costolo earlier this year. Jack Dorsey, one of the company's co-founder, is serving in the role on an interim basis.
Some analysts have suggested that Dorsey could assume the role permanently even though he also runs payments startup Square. Twitter didn't respond to an email request for comment for this story.
Meanwhile, Twitter is trying to simplify and enhance its service by adding features, including showing users a select group of tweets they missed while they were logged off. Analysts are also waiting the launch of Project Lightning, which will curate tweets from breaking news.
For now, these efforts haven't done much to encourage user growth.
"Channel checks and our survey work don't provide convincing evidence that a substantial number of advertisers will commit meaningful [dollars] to Twitter," said Mark Mahaney, an analyst at RBC Capital Markets, in note to clients. "Our concern for some time has been that Twitter's lack of real- time commercial intent (a la Google) or detailed, authenticated profiles (a la Facebook) will eventually limit [Twitter's] growth potential."