The Trouble With Twitter: Cleaning Up Is Costly


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The View From Silicon Valley

In its ongoing crusade to rid its platform of bad actors, Twitter (TWTR) faces a cold reality: Its stock may take lumps as part of the cleanup.

Twitter's results reflected as much today. It fell 19% to $34.58 even though earnings per share and revenue were in line with analysts' estimates.

The microblogging service said it earned 17 cents per share with revenue of $711 million in its second fiscal quarter. The consensus estimate from analysts surveyed by Thomson Reuters was for EPS of 17 cents, and revenue of $696.2 million.

What sent the stock reeling was a decline in monthly active users, and a warning that the closely watched MAU total could dip again in the current quarter.

The decline in the recently completed quarter--at 335 million, monthly users fell short of both the 338.5 million estimated by analysts and the 336 million total in the previous quarter--has coincided with Twitter's aggressive campaign to rid its platform of bogus accounts. In May and June, it suspended 70 million fake or suspicious accounts. When news of the purge went public, Twitter shares tumbled 9%, and some Wall Street analysts expressed concern over the impact on MAUs and future advertising.

Macquarie Research analysts last week downgraded Twitter shares to "neutral" despite raising their price target for the stock to $42 from $36. They cited concern that while the stock was up 45% this year when Macquarie published its note, the fake-account purge won't bring "dramatic impacts on Twitter's ability to attract new users," arguing that "valuation will likely limit upside from current levels.

This is not a one-time financial event, Twitter acknowledged.

"We don't think that this work will necessarily ever be done," Twitter Chief Executive Jack Dorsey said on a Friday conference call with investors. "It doesn't have an endpoint."

"As a result of our health work, decisions not to renew or move to paid SMS carrier relationships in certain markets, and our decision to allocate resources towards GDPR and health, MAU could decline on a sequential basis in Q3," Twitter said in its shareholder letter. "Based on our current level of visibility, we expect the decline to be mid-single-digit millions of MAU."

This morning's ugly share-price decline reflects some analysts' view that the company waited too long to solve a problem that has bedeviled it for years. Belatedly mopping up the mess is like "playing a never-ending game of whack-a-bot," says Rebecca Lieb, an analyst at market researcher Kaleido Insights. "Fake accounts will continue to surface just as quickly as they are deleted."

It's a dilemma Twitter-or any social network, for that matter-faces. By erasing fake accounts, they invariably reduce their estimated audiences and jeopardize potential ad revenue, Lieb and others say.

But it is a necessary strategy if Twitter is to gain the trust of many advertisers. Keith Weed, chief marketing officer at Unilever, the second-largest advertiser in the world, tweeted: "Pleased to see Twitter taking a big stand against the fake followers polluting the digital ecosystem. Great step forward which strengthens the industry. I hope to see more following."

Overall, investors have shown their satisfaction the past 12 months as Twitter has successfully pivoted to video. As of Thursday's close, its shares were up 109% during that period.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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