Shares of Twitter (NYSE: TWTR) have recovered quite a bit from their 2016 and 2017 lows, as the social media company has been able to improve engagement by combating abuse and harassment while simultaneously strengthening monetization of a fairly stagnant user base. Twitter also recently revamped its user metrics, now focusing on monetizable daily active users (mDAUs) instead of monthly active users (MAUs). The company is even consistently profitable now.
None of that is enough to impress one Street analyst.
Image source: Twitter. Image copyright Atsushi Nakamichi for Twitter, Inc.
Time to sell
MoffettNathanson analyst Michael Nathanson released a research note this morning arguing that it's currently an "especially opportune time to Sell Twitter" while reiterating a sell rating and lowering his price target on Twitter shares from $28 to $25. The company's strong performance during the back half of 2018 will create tough comparisons for the tail end of 2019, according to Nathanson. Growth has been decelerating in recent quarters as a result, which the analyst expects to continue.
Additionally, Nathanson believes that Twitter should be investing even more into its safety initiatives, even as the company has been making some progress on that front. "Twitter still does not seem to be doing enough to secure its platform, while its valuation remains as stretched as ever," Nathanson writes. Larger rival Facebook (NASDAQ: FB) has roughly seven times as many people (many of which are external contractors) working on its safety efforts, the analyst notes.
If Twitter does ramp up safety spending, that will hurt the company's margins. Both Facebook and Twitter have already seen margins pinched in recent years as they invest heavily in platform safety. For example, Facebook expects total costs to jump by 40% to 50% this year, in part due to ongoing safety and security investments even after tripling that division's head count to 30,000 last year.
Twitter still struggles with its long-standing Nazi problem and continues to drag its feet in removing racial extremist content from its platform, even after recently tweaking its rules and policies around hate speech in an effort to make its terms of service clearer.
Twitter's outlook calls for operating expenses to increase by 20% in 2019, and CFO Ned Segal reiterated earlier this year that platform health will remain Twitter's No. 1 priority. Nathanson notes that Twitter's expenses came in lower than expected in the first quarter, and while that contributed to better-than-expected profitability, it also means the company will need to accelerate safety spending later in the year.
"And as we mentioned last quarter, we expect our GAAP operating expenses for the year to increase approximately 20% on a year-over-year basis as we continue to invest to drive growth and to support the top priorities we've been talking about for some time now: health, conversation to drive audience, revenue product and sales, and platform," Segal said in April. "As you would expect, we believe GAAP expenses will ramp over the course of the year."
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.