Goldman Sachs says the rest of Wall Street is underestimating Twitter's turnaround (TWTR)

Twitter has been a tear this year — with shares soaring 82% to hit their highest price in over three years — and Goldman Sachs says the gains may not be done yet.

The bank on Thursday raised its target price for the social-media stock to $55 from $40 — a full 25% above where shares were trading — saying Twitter is doing better on its turnaround than the rest of Wall Street gives it credit for.

"We continue to believe that consensus expectations underestimate Twitter’s ability to 1) drive incremental engagement through new features and information quality initiatives, 2) better monetize engagement as advertisers leverage newer targeting and measurement functionality, and 3) show significant operating expense leverage as incremental revenue flows to the bottom-line," Heath Terry, the bank's tech analyst, told clients in a note.

Twitter has had a choppy week, as reports of its upcoming purge of spam and inactive accounts worried investors that its closely-watched active users metrics could be be impacted. Earlier this week, the Washington Post quoted an anonymous company source who said the account deletions could affect the user metric when it reports earnings on Friday, July 27. Twitter's CFO publicly rebuked those claims.

"This is nothing new and is part of our to improve the health of the public conversation on Twitter," Ian Plunkett, a company spokesperson, told Business Insider. "We have not and do not include spam accounts that we have identified in the active user numbers that we report to shareholders."

Goldman agrees with Twitter's assessment, saying its own research verifies what the company claims.

"While concerns around the impact the company’s information quality initiatives could have on reported user metrics have weighed on the stock in recent days, our advertiser checks and 3rd party traffic data suggest the impact of these ongoing efforts on user and advertiser engagement will be net positive," the bank said.

Even as Twitter becomes more expensive relative to its earnings — it is trading at 22 times its estimated 2019 EBITDA, compared with about 16 for its peers in the tech sector — Goldman says the increasing revenue and profit from its turnaround outweigh the risk of a stretched valuation.

"We believe the significant upside potential to those estimates, and additional option value in Twitter as a platform more than justify that premium multiple," Terry wrote.

Shares of Twitter rose 2% in trading Thursday, and were up 132% in the past year.