The bank says user growth is improving and revenue will likely rise in step.
Shares of Twitter surged more than 10% Tuesday after Morgan Stanley raised its price target for the stock, reversing its argument of a stretched valuation, citing improving user growth.
"While previously we were cautious about the durability of TWTR's platform turnaround, more positive advertiser/agency conversations and (we believe) improving user growth make the risk/reward more compelling," analysts led by Brian Nowak said in a note to clients Tuesday.
The bank admits it is above Wall Street's average forecasts for revenue and EBITDA in 2018, but says the stock is still worth buying as advertising revenue continues to rise, user growth improves, and Wall Street's expectations remain too low.
"Valuation continues to be expensive (not new for TWTR), but we think investors are likely to continue to pay a premium for TWTR given 1) expected revenue acceleration in '18; 2) positive revisions pointing to continued turnaround progress; 3) platform scarcity," the analysts said.
Twitter's stock price currently trades at a price-to-equity ratio of 52, almost double the S&P 500 benchmark's 28, and well above competing Facebook's 19 or Yelp's 42, according to data compiled by Bloomberg.
Morgan Stanley's new price target of $29 is still 7% below where the stock was trading Tuesday morning, but above the Street's average target of $27.40.
Twitter has struggled with quality control in recent years amid an outpouring of abuse allegations on its platform, forcing the stock well below its all-time highs for most of 2016, but the company promised a turnaround.
In its most recent transparency report released earlier this month, Twitter said it had suspended 1.2 million terrorism-related accounts in the past two years. Company insiders reportedly told Fast Company that CEO Jack Dorsey has been personally involved in blocking controversial accounts including those of so-called "alt-right" personalities.
Shares of Twitter have risen 29% since the beginning of 2018.