Twitter Inc (NYSE:TWTR) surprised everyone yesterday with its latest earnings report, and the share price increase still reflects that today. UBS analysts upgraded the company’s stock from Sell to Neutral but say that they still have some concerns about the company. They think the post-earnings share price pop is probably the top because investors are going to think more about the valuation and may see it as too high.

Twitter DM Twitter Inc TWTR
Twitter Inc TWTR

Positives and negatives in Twitter’s report

In a report dated July 29, 2014, analyst Eric J. Sheridan, and associates Vishal J. Patel and Timothy E. Chiodo say they were most positive on the 10% revenue beat driven by data licensing and international monetization. They were also very positive on the 64% EBITDA beat, which was driven by about 700 basis points improvement in gross margins and also leverage from research and development. Another positive item they noted from the company’s report was that 81% of the company’s revenue came from mobile, which is the highest rate in the whole digital advertising industry.

On the bad side though, they say 14% of Twitter’s monthly active users are driven by auto application traffic. That’s an increase from 12% in the previous quarter and about 7% to 8% in the same quarter a year ago. The UBS team says this is a sign that monetization could fall behind user growth in the upcoming quarters, especially in the U.S.

They were also negative on Twitter’s guide for EBITDA and capital expenditures for the second half of the year. They say the numbers imply greater investments than in the first half to support the company’s continuing product and user initiatives. The analysts were also less positive on the only modest upside to U.S. ad revenues and quarter over quarter growth that was just barely above trends in the industry.

Investors excited about Twitter

The UBS analysts upgraded Twitter from Sell to Neutral and raised their price target from $35 to $50 a share. They don’t think Twitter stock has much more room to run because they believe Wall Street is already pricing in better than expected results and also “excellent forward operating results.”

They note that the company did obviously outperform their user and revenue estimates and admit that their Sell rating was wrong. However, they think Twttier shares will remain range bound because of two main reasons. They say the company has industry-high revenues / EBITDA multiples and that investors will likely have questions about user and revenue sustainability in the coming quarters.

In the long term, they said they need to see continued outperformance or “more reasonable valuation multiples” in order to turn “more constructive” on Twitter.