Founder Jack Dorsey's stepping down as CEO of Twitter (TWTR) is great news for the stock.
Let’s not beat around the bush — it’s been brewing for some time.
It was only just before the pandemic that he announced his intentions to work remotely from Africa for 6 months.
Who does that?
Part of his job as CEO of a major Silicon Valley company is to deduce the pulse of the industry in real-time, and on the ground while rubbing shoulders with the rest of his kind.
Six-month African Safaris are romantic but don’t cut it when you are a top CEO of a Silicon Valley company and when major hedge funds are relying on advanced expertise to guide the company through a labyrinth of strategic and regulatory issues.
Whether he stepped down by his own will or was effectively forced out by activist shareholders, either way, the future stock price appears prime to shake off the years of mediocrity.
Why does Twitter need change at the helm?
Simply put, the stock has grossly underperformed the broader market for not only the last year but also the past 3 and 8 years.
The stock was trading around $70 in December 2013 and fast forward to today and the stock is around $50.
The underperformance comes under a backdrop of a cyclical bull market in which tech has been the leader with growth constantly reaccelerating.
Not only that, but Twitter also has a unique asset in which it has accrued massive scarcity value because no other technology company has anything like it.
Dorsey has mishandled the operation.
The nail in the coffin was certainly the user growth numbers in which Twitter was only able to grow the user base by 3% last quarter in North America.
Twitter announced earlier this year some major long-term goals in which one of them was to have 315 million monetizable daily active users by the end of 2023.
That number stands at 211 million users reported last quarter and is underwhelming.
Another objective was to surpass annual revenue of $7.5 billion by 2023 and as of last quarter, management said they were still on pace to achieve that, but I do not see that.
I agree they are on pace to hit that revenue target, but Twitter announced a highly disappointing forecast expecting $1.5 billion to $1.6 billion in revenue for the fourth quarter, which will be up 24%.
Twitter will need to maintain revenue growth in the mid-30% to achieve the numbers they promised, and Dorsey has proved that he is prone to botching forecasts.
How many fumbles will management let him get away with?
Granted, Dorsey was forced by activist shareholders to state explicit targets, and true, they were ambitious from the start.
However, much of the nudge in the backside stems from Dorsey largely underachieving as a CEO especially during the golden years of ad tech.
Investors saw when Founder and CEO of Facebook (FB) Mark Zuckerberg was able to release animal spirits for his ad technology platform and it’s fair to question why Dorsey can’t do the same for his company.
Even though harsh, comparing your company to Facebook is not everyone’s cup of tea, but Twitter is in the same exact industry as Facebook deploying the same exact products, so they can’t really complain about comparing.
In the last 10 years, Facebook has returned shareholders 17X their investment and Zuckerberg was agile enough to rotate from a stale Facebook platform to a booming Instagram platform.
The last major Twitter forecast called for a long-term target of 40% to 45% adjusted EBITDA margin.
For the fourth quarter, Twitter is looking for operating income in the $130 million to $180 million range. That would be down 29% the prior year.
Profitability per unit is decelerating.
As it stands, I do not envision Dorsey achieving his 2023 targets if he stayed and on top of that, changes to the iOS system have made ad targeting more difficult to extract the necessary monetizable data.
In an environment where data visibility is reducing, and other regulatory changes could be coming down the pipeline, the shareholders most likely felt they needed a change at the top.
Dorsey is by and large the legacy of what was left over after Twitter was created, and many investors know, it’s hard to kick out these tech CEOs that usually possess super-voting shares which makes it so they must vote themselves out to leave as CEO.
Dorsey didn’t have that level of moat around his position and eventually, the underperformance caught up to him.
Twitter will insert Parag Agrawal, the company’s chief technology officer, as new CEO in hopes of supercharging revenue, user, and margin growth that shareholders have been patiently waiting for.
If Agrawal can fix Twitter, then Twitter is easily an $80 stock.
Remember that Dorsey is still the CEO of Square and hasn’t been shy in expressing his passion for cryptocurrencies, and it’s likely there that he will finally be unshackled from the annoyance of running Twitter and get to focus on his favorite company.
Honestly, he hasn’t seemed interested in Twitter for a while, so it’s a win–win for both companies.
