NEW YORK (Reuters Breakingviews) - Twitter has purged users and shareholders alike. The social network’s efforts to reduce spam, fake users and toxicity shrank active monthly users between March and June. Investors fled as well, sending the shares down 16 percent in early morning trading on Friday. That leaves both the platform and valuation more salubrious.
Jack Dorsey’s social network is doing a better job of finding advertisers: its second-quarter results showed revenue rising 24 percent compared to a year ago. Yet the firm’s 335 million user base and $711 million of total revenue look oddly scrawny considering it is the megaphone of choice for figures such as President Donald Trump.
The noxious atmosphere doesn’t help, and Twitter is finally getting serious about it. It has made it slightly harder to create accounts, reduced the visibility of suspicious users and booted fake ones. That’s good for real users – removing twice as many spam accounts as it did a year ago reduced related complaints by nearly a third between March and May.
Yet the market had more than doubled Twitter’s value over the past year to $32 billion, and the valuation to 50 times estimated earnings. The only way for Twitter to grow into this was to show outsize growth in both users and revenue. The fact that monthly active users shrank by 1 million during the quarter compared to the previous one – and will fall another “mid-single digit millions” in the next quarter - caused many of these trend followers to fly away.
These developments are healthy, but they may not be sufficient. Stalled American user growth and tighter rules on data protection in Europe may dampen revenue growth in two of the company’s biggest markets. Investment to improve the platform will also be costly. The company is increasing planned capital expenditure and will continue to spend more on getting rid of bad users.
Making the platform healthier will probably encourage those already on the platform to use it more. The company said that daily active users increased 10 percent compared to last year, but – inexcusably – does not disclose the actual figures. Unless this cleaned-up environment brings new users too, even Twitter’s shrunken valuation isn’t shrunken enough.
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