#1: Late last week, Twitter CEO Dick Costolo announced he would be resigning effective July 1 and co-founder Jack Dorsey will serve as the interim CEO. At face value, this turn of events seems like a change for the better, but under the surface, nothing has changed at all.
Twitter’s situation is not a “Steve Jobs returns to Apple” moment, no matter how much investors would like to believe so. Jack Dorsey is currently the CEO of another company he founded, payment solutions provider Square Inc. Splitting time between Square, which, as of April 2014 was struggling to monetize its products, and Twitter, which is facing even worse difficulties monetizing its service, is not a winning combination. Twitter needs a CEO committed to overhauling its entire business model and creating a profitable business. While Jack Dorsey may only be the interim CEO, Twitter remains stuck in no-man’s land as long as he remains in this position.
#2: The company faces numerous challenges that require serious review of the company’s strategy. Yet, Mr. Dorsey has stated that he does not foresee any changes in strategy or direction and that the plan in place is working. As Twitter’s stock reaches new 52 week lows, it’s clear that the market does not agree with Jack Dorsey and neither do we.
#3: Worst of all for investors is that no CEO change or short-term solution will fix quite possibly the company’s biggest problem: its business model. Twitter’s business model places its users at odds with its revenue sources. A larger user base will attract more spending from advertisers, but this increased advertising will inevitably turn off many Twitter users. Without an entirely new revenue source, Twitter’s business model remains flawed, regardless of its leadership.
Stock Price Remains Overvalued
Despite Twitter’s stock price being down 3% since Dick Costolo’s announcement and 5% since our initial report was published, the stock remains significantly overvalued. As we noted in our prior article, even if Twitter can achieve pre-tax (NOPBT) margins of 10% and grow revenues by 20% for the next decade, the stock is only worth $14/share today. A change in CEO alone can’t fix an overvalued stock and it appears Twitter’s stock decline since its IPO may have only just begun.
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Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.
Photo Credit: Scott Beale (Flickr)