Twitter earnings: Will bot cleanup damage stock’s big run-up?

Twitter Inc. stock has been on a tear this year, nearly doubling in value at times despite questions about the effects of the reported million-per-day rate at which the company removes fake accounts.

The massive rise in Twitter TWTR, -2.63%  stock was put on hold last week, amid a report of the company removing 70 million accounts in May and June that suggested the move could result in a decline in Twitter’s active-user count. Wall Street currently forecasts the company will report 338.5 million monthly active users in second-quarter earnings due before the market opens on Friday; the company does not reveal its daily active user count.

In response to the Washington Post story, Twitter Chief Financial Officer Ned Segal said, “Most accounts we remove are not included in our reported metrics as they have not been active on the platform for 30 days or more, or we catch them at sign up and they are never counted.” He added in a second tweet that if the company removed 70 million accounts from the numbers it does give to investors, the company would say so directly.

Twitter’s user numbers tend to be one of the most important metrics investors watch, and difficulty increasing that metric in recent years has cast a pall over the company. Twitter beat expectations for user growth in the first quarter, however, and has shown better profitability in recent quarters, helping the stock grow 73.6% so far this year.

Barclays analyst Ross Sandler wrote in a note to clients in July that he expects “some choppiness” in the monthly active user number, and said there is the potential for the company to restate user totals from earlier quarters. Like rivals Facebook Inc. FB, +1.78%  and Snap Inc. SNAP, -1.87%  , Sandler wrote that the company will also likely report issues around the European Union’s General Data Protection Regulation, which went into effect during the second quarter. Sandler has the equivalent of a sell rating on Twitter with a $24 price target.

Macquarie Capital analyst Benjamin Schachter wrote in a note to clients last week that removing fake accounts is a good thing for Twitter, but his team has concerns about overall use of the platform.

“Despite [President Donald] Trump being perhaps the most high-profile user possible, usage has not dramatically improved over the past couple of years (the U.S. had flat y/y growth in 1Q’18),” Schachter, who has the equivalent of a hold rating on the stock with a $42 price target, wrote. “We simply don’t see the product improvements having a dramatic impact on TWTR’s ability to attract new users (though it can, and likely is, helping to retain and improve the experience for current users).”

What to expect

Earnings: Analysts polled by FactSet estimate second-quarter adjusted earnings of 16 cents a share on average. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict adjusted earnings of 19 cents a share on average. Twitter is expected to post a GAAP profit for the third consecutive quarter, which it had never done before the beginning of the current run.

Revenue: Analysts expect sales of $698 million on average, according to FactSet. The bulk of Twitter’s revenue is from advertising, which is expected to haul in $599 million, the majority from inventory that Twitter owns and operates; the company’s ad network is estimated to contribute $49 million to the top line. Analysts model second-quarter sales of $97 million for Twitter’s high-margin data-licensing segment. Estimize contributors model sales of $707.6 million on average.

Stock movement: Since posting its first profit after the December quarter, Twitter stock has been steadily climbing, gaining roughly 38% in the past three months, as the S&P 500 index SPX, +0.48%  gained 4.9%.

Of the 39 analysts that cover Twitter, nine have the equivalent of a buy rating on the stock, 20 rate it a hold and ten have the equivalent of a sell, according to FactSet. The average price target is $34.09, which represents 18.7% downside from Monday’s closing price.

Everything else: The beautiful game might contribute to an outsize quarter for Twitter, as the World Cup has historically, according to MKM Partners analyst Rob Sanderson. In the second quarter of 2014, the World Cup added $24 million to the top line and there’s little reason to expect anything different this year. In fact, says Randerson, the upside is already baked into the stock price, and the company will benefit even more than 2014.

This year’s World Cup, wrote Sanderson in a note to clients Friday, will likely be more lucrative for the microblogging platform because Twitter’s service is better, there is more content, video ads are worth more and the company is selling more ads outside of the U.S.

Sanderson rates Twitter a buy with a $43 price target.

Outside of the company’s ad business, the company’s data-licensing segment has been a boon of late because of its thick margins and potential upside — when the company went public years ago, investors saw Twitter’s vast trove of data the real prize beyond ads. Even though the company hasn’t managed to turn it into a cash fire hose, it’s still worth keeping an eye on.