Another Analyst Is Defending Twitter's Purge

Twitter (NYSE:TWTR) kicked off the week with a precipitous plunge, following a report that the company had purged over 70 million accounts in May and June. Considering the fact that Twitter had roughly 336 million monthly active users (MAUs) in the first quarter, the figures made investors nervous that Twitter’s user metrics — which have always been a point of concern — could take a hit when it reports second-quarter results at the end of July.

JPMorgan analyst Doug Anmuth defended the company, saying the sell-off was an overreaction. It also helped assuage investor fears when Twitter CFO Ned Segal tweeted that “most” of the removed accounts were never included in the company’s user metrics due to inactivity.

Now, another Street analyst is stepping up to defend the move.

Fighting fake news

CNBC reports that Goldman Sachs analyst Heath Terry has released a research note reiterating his buy rating on Twitter shares while boosting his price target from $40 to $55, representing over 20% upside from today’s close. (That’s $5 higher than Anmuth’s price target.) Terry believes that the purging of inactive, spammy accounts is a net positive for the overall health of the platform. Importantly, combating abuse, harassment, and spam encourages advertisers to spend more on Twitter.

Image source: Getty Images.

Twitter has been talking about its broader efforts to improve information quality, and curbing spam is a big part of that. In his opening remarks on the April earnings call, CEO Jack Dorsey noted:

This quarter we committed to help increase the collective health, openness, and civility of public conversation on Twitter, and to hold ourselves publicly accountable toward progress. We’re investing in improving the health of our service by building a framework to help encourage more healthy debate, conversations, and critical thinking. And we’re soliciting external experts to help us get this right. This is a holistic approach, inclusive of our ongoing work in safety and information quality where we continue to make progress.

“Twitter continues to build on ‘Information Quality’ efforts they first spoke about on the fourth-quarter earnings call by moderating unwanted behavior, spam accounts, and low quality tweets through product innovation, acquisition, or more active removal of violating accounts and developer applications,” Terry wrote in the research note, according to the report.

Fighting spam and abuse helps engagement

Twitter has been executing very well on its overall turnaround plan for the past several years — including recently posting its first GAAP-profitable quarter — and Terry doesn’t believe the Street is fully appreciating that progress. Analyst consensus estimates could be underestimating the company’s ability to continue bolstering engagement and monetization, in Terry’s view.

There’s no question that engagement continues to rise, judging by the daily active user (DAU) growth figures that Twitter often touts (but won’t disclose in absolute numbers). To the extent that Twitter is successful in cleaning up its platform, that trend could be here to stay.

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Twitter. The Motley Fool has a disclosure policy.