Twitter sinks after analyst flags accounting 'smoke and mirrors’

Twitter shares are sliding after one Wall Street bear rang the alarm on the firm’s spending, flagging “smoke and mirrors on the cost line”.

In the first two quarters of the year, the company reported 0% and 3% operating-expense growth, respectively - surprisingly low given issues with regulators and competition, MoffettNathanson founding partner Michael Nathanson wrote in a note to clients on Monday. But the analyst thinks there may be more to those numbers than meets the eye.

“After digging into the most recent 10-Qs, we would argue that true underlying cost growth has actually been materially higher in the range of +13% to +15%,” he said. “Given Twitter’s dire need to improve platform safety and invest in more video content, we believe that expenses are set to escalate into the back-half of the year and in 2019.”

Twitter did not immediately respond to a request seeking comment.

The stock dropped as much as 5.6% to the lowest intraday in about five months, taking other large-cap technology firms down with it. All 10 members of the NYSE FANG+ Index were in the red on Monday, with the declines led by Twitter, which was also the worst performer in the S&P 500 Index.

“Consensus estimates appear to be under-estimating Twitter’s expense build and will likely need to revise down margin expectations in 2019,” continued Nathanson, who is one of six analysts with a sell rating on the company, according to Bloomberg data.

“With operating leverage flattening out, Twitter’s extreme valuation will come back into focus, which wouldn’t be a good thing for the stock.”

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