That Twitter bird looks good on the NYSE, but the company isn't profitable. Photographer: Scott Eells/Bloomberg
That Twitter bird looks good on the NYSE, but the company isn't profitable. Photographer: Scott Eells/Bloomberg

Does anybody really know why Twitter Inc.'s stock price fell 18 percent today? I, for one, do not.

A lot of the news reports are focusing on the fact that Twitter's lockup period expired today. This means restrictions on sales by insiders and early investors were lifted, and about 480 million shares became eligible for sale. Those restraints were set by the company's Wall Street underwriters as part of Twitter's initial public offering six months ago.

The date was well-known and well-publicized long before today. As Bloomberg News reported yesterday, "some of Twitter’s biggest stock owners who in total have at least 205 million shares -- including venture capital firm Benchmark and co-founder Evan Williams -- have declared they’re not letting go of their equity."

If the lockup expiration is the reason for Twitter's stock plunge, it would be an awful indictment of the efficient-market hypothesis, which holds that the prices of publicly traded securities reflect all publicly available information. Not that I was much of a believer in the theory. Maybe some investors were seizing on the expiration as an excuse to sell, for fear that other investors would think that other investors might think it mattered. Or something like that. But I'm no psychologist. (Much of today's trading is driven by computers and algorithms anyway.)

A similar thing happened in January 1999, when shares of Mark Cuban's old company, Broadcast.com Inc., lost as much as a third of their value on the day a lockup agreement expired. After the previous Internet bubble burst in 2000, investors generally stopped caring about lockups. Most expiration dates passed without anyone paying much attention. Is Twitter an exception? I don't know. I would try asking Mr. Market, but he doesn't return my phone calls.

Although we don't know if Twitter's lockup expiration had anything to do with today's drop, the company's valuation almost certainly did. Twitter isn't profitable. At $31.85, its stock price has been cut in half this year. Yet the company still has a $19 billion market value and trades for almost 24 times revenue over the last four quarters, which is a huge multiple. The stock could fall a further 80 percent and, arguably, still be overvalued.

Sometimes investors just decide they're not willing to pay that much for companies anymore. Sometimes stocks go down (or up) simply because they're going down (or up). The catalyst for the momentum shift doesn't have to be obvious. If the valuation weren't so high, the stock wouldn't be so vulnerable to the market's whims, whatever they might be.

To contact the writer of this column: Jonathan Weil at jweil6@bloomberg.net.

To contact the editor of this column: Paula Dwyer at pdwyer11@bloomberg.net.