SAN FRANCISCO — Shares of Twitter went into free fall on Tuesday as early investors became eligible to sell their shares on the market for the first time. The company’s shares dropped 17.8 percent, to close at $31.85, their lowest level since the company’s initial public offering of stock in November.
Market watchers said the immediate cause of the plunge was the end of a lockup period that had prevented company insiders and early investors, who hold most of the shares, from selling their stock. Young companies that go public typically restrict employees and investors from selling stock for a period of time to prevent the market from being inundated with shares.
In Twitter’s case, the end of the lockup on Tuesday arrived in concert with growing concerns about the microblogging company’s ability to capture a mainstream audience.
Twitter sold about 80 million shares to the public in its initial offering, and about 10 million more shares held by employees became available in February.
Twitter’s stock activity since it went public.
On Tuesday, another 480 million shares owned by insiders became eligible for sale.
Although many of the company’s leaders and biggest investors recently pledged not to sell their holdings, Robert Peck, an analyst at SunTrust Robinson Humphrey, estimated that as many as 200 million newly released shares could soon enter the market. It was unclear how many of the insiders’ shares were sold on Tuesday, but the prospect of all that new stock flooding the market set off a frenzy of selling. About 135 million shares traded hands, 10 times the normal volume.
Twitter’s public offering was widely seen as successful compared with the offering of Facebook, one of Twitter’s rivals, which stumbled out the block.
Shares of Twitter initially sold for $26 and rose by December to $75 a share, even though the company had yet to turn a profit. But in the last few months, concerns over user growth have cut the company’s stock price in half. Facebook’s stock, in comparison, tumbled after its initial public offering in 2012. But Facebook’s stock has recovered and is up about 54 percent from its initial trading price.
In its two quarters as a public company, Twitter has disappointed Wall Street, posting anemic user growth even as revenue more than doubled in the first quarter, to $250 million. While the company has tried to entice new users and engage existing ones with product tweaks and improvements, it has not shown the meteoric rise in user growth usually expected from young technology companies. Twitter said it had 255 million monthly users globally in March, up 5 percent from 241 million at the end of December, which closed a quarter in which monthly active users increased less than 4 percent.
And user engagement — measured by the number of times Twitter users refresh their news feeds — declined 3 percent among Americans compared with the year earlier, and 10 percent in crucial markets overseas, where most of Twitter’s future growth is likely to emerge.
The company has attributed the engagement declines to product changes. In recent months, Twitter has tried to make its platform more intuitive, by redesigning its profile pages and making it easier for users to use photos and videos in their 140-character posts. The company has also been experimenting with an easier way to sign up new users and allowing customers to import their mobile phone contacts so they can follow people they know as they get used to the service.
In an interview last week, Richard Costolo, Twitter’s chief executive, said the company would continue to make changes to entice new users and keep current users. Twitter did not respond to requests for comment on Tuesday.
Wall Street is not convinced the company’s recent efforts are enough to accelerate user growth and attract the general masses. Mr. Peck, the SunTrust analyst and the first analyst to issue a buy rating on the company’s stock before its public offering, cut his rating to neutral in December and predicted the stock would fall when its lockup expired.
Other analysts have been even less sanguine. Eleven of 31 investment analysts polled by Thomson Reuters last month rated Twitter a sell, while seven deemed it a buy. The others maintained a neutral or its equivalent.
“Twitter is a great service but it’s a niche service,” said Eric M. Jackson, founder of Ironfire Capital, who predicts Twitter’s stock will decline further. “Despite everything Twitter’s management is trying to do to monetize its user base, I just don’t think it’s ever going to be a billion-user service like Facebook.
“The valuation has gotten ahead of itself,” Mr. Jackson added. “It has to contract before it expands again.”