Yesterday, Twitter, Inc. (TWTR) went viral, and not in a good way. TWTR shares gapped lower after it announced that it is now suspending more than one million fake accounts a day. Why did investors panic over the news? What does this mean for the social network going forward? And most important: Should you buy or sell TWTR?
I’ll answer these questions shortly. But first, let’s revisit Twitter. Obviously, this is one of the world’s leading social networks. Twitter launched in 2006 and made a big splash at the 2007 South by Southwest Interaction conference. In just a few days, daily Twitter usage tripled, from 20,000 tweets to 60,000 tweets.
From a user standpoint, Twitter’s rise has been meteoric. Nowadays, there are over 500 million tweets posted every day. At the end of the first quarter, Twitter boasted 336 million monthly active users—69 million in the U.S. and 267 million abroad. This number—monthly active users—is very important to analysts and shareholders.
So, when Twitter announced yesterday that it is cracking down on fake accounts, this was big news. In May and June, the social network booted more than 70 million accounts. This pace, which has more than doubled since October, is expected to continue in July.
Clearly, Twitter is cracking down on fake news, spam and bots. This isn’t surprising. What is surprising is that Twitter’s number of monthly active users may dip in the second quarter. Investor panicked over this news, so TWTR pulled back yesterday.
However, this is a buying opportunity. According to Twitter, many of these fake accounts aren’t active accounts. So, the crackdown shouldn’t negatively impact second-quarter monthly active users too much. Some investors are likely using this news as an excuse to take profits on TWTR.
As for me, I’m recommending TWTR leading up to its second-quarter earnings announcement on July 27. The consensus estimate calls for $0.16 earnings per share on $692.7 million in revenue. This represents a whopping 100% earnings growth and 20.7% sales growth.
Also, the consensus EPS estimate has jumped 33.3% over the past 90 days. This suggests that TWTR will once again beat earnings expectations, as it has for the past several quarters running.
Look for TWTR to bounce in the coming weeks. TWTR is an A-rated Strong Buy in my Portfolio Grader tool, and I just added it to my Growth Investor newsletter.