Shares of Twitter (TWTR) had it rough yesterday following a report that the company had purged 70 million accounts in May and June as part of its broader efforts to scrub the site of trolls and Nazis. At face value, 70 million could potentially represent a full fifth of the 336 million monthly active users (MAUs) that the company had in the first quarter. The stock fell by as much as 10% before recovering somewhat to close out the day down 5%.
Is this a buying opportunity in disguise?
Image source: Twitter. Image copyright Atsushi Nakamichi for Twitter, Inc.
At least one analyst thinks so
Tech Trader Daily reports that JPMorgan analyst Doug Anmuth is reiterating an overweight rating on Twitter shares alongside a $50 price target, arguing that the sell-off is overdone and investors are overreacting. At issue is the discrepancy between registered accounts (which Twitter does not disclose) and monthly active users (MAUs), two of Twitter's most pertinent operating metrics.
As I noted yesterday, a lot of those purged accounts were likely dormant anyway, in which case Twitter won't take nearly as big of a hit in MAUs when it reports second-quarter results later this month. Twitter CFO Ned Segal assuaged investor and analyst fears by clarifying "most" of the removed accounts were already excluded from reported user metrics due to inactivity. Others are caught when trying to register a new account for malicious purposes.
If we removed 70M accounts from our reported metrics, you would hear directly from us. This article reflects us getting better at improving the health of the service. Look forward to talking more on our earnings call July 27!
— Ned Segal (@nedsegal) July 9, 2018
Segal's tweet seems to have accomplished its purpose in reassuring the market, as shares recovered on strong volume following the public message. Anmuth believes that "a significant portion" of the purged accounts were dormant, in which case they were already being excluded from user metrics. The analyst also thinks that Twitter's anti-spam and anti-abuse technology has improved meaningfully, to the point where it can block suspicious accounts before they can do any harm.
For what it's worth, Twitter is looking to build on that anti-abuse momentum with its recent acquisition of Smyte, whose tools will help Twitter better scale and automate its safety operations.
Third time's the charm?
Twitter stock is up nearly 150% over the past year, and Anmuth's price target represents a relatively less impressive 13% upside from yesterday's close.
It's probably appropriate to temper expectations going forward after that run-up though, as Twitter shares now trade at 5.4 times sales. The company has made undeniable progress in stabilizing its financial condition through cost-cutting, which delivered its first ever GAAP-profitable quarter earlier this year. The next quarter was also GAAP-profitable, but attributable to revenue growth instead of cost-cutting.
Investors have a clear preference for the latter over the former, but it's too early to say whether Twitter will maintain its profitability streak, or how it will do so.
