2 Key Issues Are Pressuring Twitter; Will Its Q3 Report Show Improvement?

Shares of this social media giant have plummeted—currently trading at $29, the stock is down 39% since it reached a multiyear high this summer of nearly $48. In fact, during the third quarter, Twitter was the worst performing S&P 500 stock.

There are a number of critical catalysts currently pressuring Twitter shares. We believe their earnings call will highlight the issues, but show no real solutions just yet.

The evidence continues to suggest that it will take much longer for social media companies—including Twitter—to overcome security challenges such as fake accounts and the threat of political interventions. Twitter Chief Executive Officer Jack Dorsey told members of Congress in September that he was rethinking core parts of the company’s product in order to improve the health of conversation on the platform.

During the past few months, Twitter rolled out a stricter registration process for developers requesting access to Twitter data; it's now suspending about 30,000 applications each month.

Cleaning the Twitter platform of spam, fake accounts and malicious rhetoric is a long-term battle which has implications for the company’s key performance metric: monthly user growth. In the second quarter, that number came up short—missing by one million users when compared with analyst expectations. And there is a little chance that we will see a meaningful recovery in the third quarter as Twitter continues to clean its platform.

Bottom Line

In the short run, Twitter stock doesn’t have any positive triggers that could break this bearish cycle and move its shares higher. We expect further weakness in Twitter shares as the company intensifies its efforts to remove millions of suspicious accounts that post misleading links, sensitive information or disturbing content.

As well, such efforts will push costs higher and depress the company's profitability, increasing post-earnings downside risk. We see Twitter stock trading in the $15-20 range over the next three months.