Stock Deconstruction

Twitter share price: can Jack Dorsey turn things around?

The social media giant’s co-founder and CEO Jack Dorsey has endured an attempt to oust him. Now, can he deliver the lofty new targets set as part of the truce? And how will Twitter’s share price respond?

Twitter [TWTR] CEO Jack Dorsey is to retain the leadership of the company he co-founded — for now. The decision is part of a truce agreement with Elliott Management Corporation, a $40bn “activist” hedge fund run by Paul Singer, which specialises in buying up large chunks of firms then demanding change in the way they’re run. It has been pushing for a management change at the social platform.

 

 

 

After taking a $1bn stake in the firm — or 4% of ownership — the hedge fund launched an assault on Dorsey calling for his removal as CEO, and put forward four nominees to stand for election to the firm’s board. Elliott Management Corporation’s grievances were ones shared by many investors and analysts. Dorsey is in the unusual position of serving as CEO of two major tech companies — Twitter and Square [SQ]. But how has the share price responded to all this boardroom upheaval?

Since Dorsey returned as CEO in 2015 (after first being ousted in 2008), Twitter’s share price has fallen far behind competitor Facebook [FB], which has more than doubled in value.

Dorsey has also recently announced that he would be spending as much as six months of 2020 in Africa seeking out cryptocurrency opportunities — a move he since reigned back, citing concerns over the coronavirus pandemic.

Investors and analysts appeared to like the idea of Dorsey getting the boot however, with Twitter’s share price popping by around 10% in the days after the news broke on 29 February.

“Twitter is a great product, but we see a disconnect between the current valuation and fundamentals. We welcome Elliott’s position as a catalyst to improving execution, even if the activist push is unsuccessful,” AB Bernstein analyst Mark Shmulik wrote in a note following the announcement.

"Twitter is a great product, but we see a disconnect between the current valuation and fundamentals. We welcome Elliott’s position as a catalyst to improving execution, even if the activist push is unsuccessful” - AB Bernstein analyst Mark Shmulik

Winning the battle

But 10 days since the news of the plans broke, it was announced that an agreement had been reached for the hedge fund to cease its attack and for Dorsey stay on as CEO. Twitter is susceptible to influence by activist hedge funds due to it only having one class of share with equal voting writes, but with only three director seats being up for election each year it’s not possible for control to be fully captured.

Dorsey has however agreed to a new set of high growth and performance targets as part of the deal: 20% user growth in the near future and accelerated year-on-year profit and digital ad market share growth.

With Dorsey’s famously hands-off, zen approach to management, many will continue to question whether he is the person to lead the company to these new ambitions.

In truth, he still may not need to, with the board restructuring looking like a step towards Dorsey’s departure. As part of a new “cooperation agreement” with Elliott Management Corporation, Twitter agreed to take on a $1bn investment from investment firm Silver Lake to fund share buybacks.

$1billion

Silver Lake's investment in Twitter

It also meant Elliott Management Corporation will take two board seats. These include Elliott’s head of activism Jesse Cohn, who has led the push against Dorsey, and Elliott ally Silver Lake taking the other. On the 11-person board, Dorsey will now be the only Twitter insider.

It would not be he first time a CEO left after Elliott Management Corporation gets involved. Last year, after Cohn also joined eBay’s board under a similar setup, CEO Devin Wenig resigned within months.

 

Market Cap$20.912bn
PE ratio (TTM)14.32
EPS (TTM)1.87
Quarterly Revenue Growth (YoY)10.80%

Twitter share price vitals, Yahoo Finance, 16 March 2020

 

What does it mean for traders?

The new ambitious growth targets can only be a positive for Twitter and its share price. But with leadership now looking uncertain in the coming months, progress could stutter, especially if Dorsey is ultimately ousted and replaced. If he does stay, his recent record doesn’t reflect that he is able to deliver the kind of innovation Twitter needs to grow.

Many analysts are, like AB Bernstein analyst Mark Shmulik, confident that the intervention of Elliott and Silver Lake can only be a good thing for the share price long-term, whatever Dorsey’s future.

Summarising the bull case, Vishesh Raisinghani wrote in Seeking Alpha: “Twitter is undervalued even with Jack Dorsey at the helm. The Elliott catalyst could cut costs, boost growth and unlock much more value. For shareholders who enter now, it's a win-win no matter what happens.”

"Twitter is undervalued even with Jack Dorsey at the helm. The Elliott catalyst could cut costs, boost growth and unlock much more value. For shareholders who enter now, it's a win-win no matter what happens” - Vishesh Raisinghani

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