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Ever since the controversial 2016 presidential election, social-media firms have been under the gun for facilitating disinformation campaign. The latest company to take a public-relations hit is Twitter (NYSE: TWTR ), which was exposed for its recent "clean-up" efforts. With its earnings report mere weeks away, the natural concern is the impact towards Twitter stock.
Late last week, The Washington Post first broke the story that Twitter " suspended more than 70 million accounts in May and June" for abusing the platform, primarily for spreading propaganda.
That's a phenomenally large figure, representing nearly 21% of the company's 336 million monthly active users (MAUs). But the issue isn't about raw numbers per say, but their implications towards Twitter's business.
More Eyes More Dollars
According to Zacks.com , advertising revenue accounts for roughly 86% of Twitter's total revenue . This is the core reason why Twitter and rivals Facebook (NASDAQ: FB ) and Snap (NYSE: SNAP ) emphasize MAU growth.
Obviously, more eyeballs lead to greater, meaningful engagement, and less traffic on competing platforms. But critically, increased MAUs provide confidence to advertisers that their money is well-spent.
At this immediate juncture, that confidence is likely shaken. Not helping matters is that the Post asserts the suspension efforts are still gaining momentum in July. Twitter has suspended accounts at a rate of a million per day in recent months.
The other headwind weighing on Twitter stock is public perception. Both Twitter and especially Facebook faced congressional pressure regarding a Kremlin-backed disinformation offensive. The Cambridge Analytica fiasco hurt Facebook for just indirectly and inadvertently aiding President Trump's campaign. Thus, Twitter investors have legitimate concerns of a backlash.
The timing also couldn't be worse. Not only is the company reporting its second-quarter fiscal 2018 earnings report on July 27, Twitter is in the middle of a convincing recovery.
Expect a Muted Response Towards Twitter Stock
Not everyone was displeased to see Twitter's troubles, most notably its most famous (and infamous) active-user. Trump added some levity to the situation, tweeting:
"Twitter is getting rid of fake accounts at a record pace. Will that include the Failing New York Times and propaganda machine for Amazon, the Washington Post, who constantly quote anonymous sources that, in my opinion, don't exist - They will both be out of business in 7 years!"
I have to give it to POTUS: that was funny! And while I'm sure most Americans are rolling their eyes, we can all take an indirect lesson from our President. This controversy is probably not going to be as bad as initial fears suggest. Moreover, it's not the time to dramatically change your thesis on Twitter stock.
First, the clean-up efforts are a net positive for Twitter, and perhaps the social-media industry. That's because no advertising company wants to invest their dollars on fake traffic and automated bots.
On one hand, the amount of trolling or malicious accounts is staggering. On the other hand, management demonstrably proved that they take this issue seriously, and will do anything to stop it.
Second, the pivotal reason why TWTR stock has enjoyed a robust recovery over the past year is recent sales growth. Additionally, management focused on tighter controls on its financials, keeping expenses in line with revenue trajectory.
Combined, these strategies resulted in Twitter posting two consecutive quarters of positive earnings.
Eliminating junk accounts has no bearing on Twitter's fundamental progress. Indeed, as I mentioned above, the suspensions are a positive development. Yes, the company will be under greater scrutiny. But in the end, management will send the message to advertisers that their eyeballs are genuine.
Account Suspensions Are a Footnote, Not a Fork
In the bigger picture, I believe most people will look back at this incident as a minor blip. It's significant enough to include in a footnote, but that's about it. It's not a fork in the road where you must decide the fate of your portfolio.
This reminds me of Facebook's politically-charged controversy involving data-research firm Cambridge Analytica. Reactionary individuals responded with the #DeleteFacebook campaign, but it got nowhere. As our own Thomas Scarlett stated, Facebook's " fundamentals are still strong ."
Which is to say that Cambridge Analytica had no bearing on FB. It was a side-show, or what I called a political witch-hunt. The same example applies to Twitter stock. That fake accounts exist doesn't impugn upon management's recovery efforts.
I'll sum it up this way. If you absolutely hate TWTR stock, the account suspensions add nothing to your bearishness. If you love Twitter, I'd caution against an emotional response.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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