The stock has generally tracked higher since our

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The stock has generally tracked higher since our upgrade at $19 in November 2017, recently reaching $30, but has recently struggled amid the Facebook fiasco and the potential for increased regulation of social media. As for things it can control, Twitter management is committed to improving the overall user experience and growing its user base, and to growing ad revenue via improved core ad offerings and new channels of demand. At this stage, we believe monetization of MAUs is more important that actual MAU growth. At present, data security issues and removing malicious users is impacting growth; as these issues recede later this year, we look for stronger MAU growth. With Twitter’s margins expanding and EPS growing faster than sales, the stock’s valuation metrics have come down from the stratosphere. Our blended valuation for Twitter has now reached the $50s and is climbing. We are cognizant of the risk of further share-price turbulence given the social media macro-environment and as the company works to sustainably grow advertising revenue and MAUs. We recommend TWTR for highly risk-tolerant investors prepared for further fluctuations in the share price, to our 12-month target price of $40. Our long-term rating is also BUY. RECENT DEVELOPMENTS For 2018, TWTR is up 21%, while social, internet & cloud peers are up 16%. TWTR shares rose 47% in 2017, while the peer group of Argus-covered cloud, social media & internet service providers rose 39%. TWTR fell 29% in 2016, compared to a 2% decline for peers. It fell 36% in 2015, while the peer group rose 29%, and declined 44% in 2014 versus a 3% gain for the peer group. TWTR went public in November 2013 in the mid-$40s and finished 2013 in the mid-$60s. For 1Q18, Twitter reported revenue of $665 million, which was up 21% year-over-year and down a less than seasonal 9% from the peak fourth quarter. Revenue exceeded the $604 million consensus call, marking a fourth consecutive quarter of far exceeding consensus. Non-GAAP earnings totaled $0.16 per diluted share, up 53% from $0.11 a year earlier and down $0.05 in 4Q17. Non-GAAP EPS topped the consensus by $0.05, also the fourth-straight above-consensus result. After an initial surge on the positive results, TWTR shares sold off on company caution regarding MAU growth. We think any slowdown in MAU growth in the near term will be driven by a new rigor around safeguarding user data and privacy; ongoing efforts to eliminate the most hateful and incendiary users who overstep bounds; and compliance with GDPR (general data protection regulation) requirements. As these issues are addressed, we expect a stronger trend in MAU growth later in 2018 and going forward, based on the increasingly user-friendly Twitter platform.
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M ARKET D IGEST - 19 - CEO Jack Dorsey highlighted key positives in the quarter. Revenue growth accelerated to the 20% range in 1Q18, driving better than anticipated profitability. Audience and audience engagement continue to grow, reflecting improvements in the product.
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