Twitter Stock: Dick Costolo Needs to Go

There was really nothing to like about Twitter Inc’s (NYSE:TWTR) first-quarter earnings report. Revenues came in well below the consensus and the guidance for Twitter stock was also weak. The company also posted yet another net loss.

Twitter Stock: Dick Costolo Needs to Go

With Twitter stock off about 22% on the news, CEO Dick Costolo’s credibility is in tatters. If he does not leave on his own, it would not be surprising that activist investors will take steps to push him out instead.

A key role of a CEO in any public company is to manage Wall Street expectations. This is certainly not easy, especially in dynamic industries like social media. But CEOs at companies, such as LinkedIn Corp (NYSE:LNKD), have shown that it can be done quite well.

Costolo, on the other hand, does not seem to have a handle on what’s happening with his company. The first-quarter disaster was not his first, after all. Back in May and October there were other horrible earnings reports as Twitter stock plunged.

Now it’s true that Costolo has been focused on creating a better product so as to juice user growth. The problem: he has really only made things worse! The reason is that he has mostly introduced new features and products that seems to have just increased the complexity and confusion.

Instead, Costolo should have prioritized on making the existing service much easier. As noted in a recent article in The New York Times, Twitter is still wonky, with such things as retweets and hashtags.

Facebook’s Mark Zuckerberg was also in the hot seat several years ago. But instead of launching many new features, he made sure the core service worked rock-solid on mobile platforms. He also invested heavily in analytics and ad systems. Of course, it did not take long for FB to get traction. Since the IPO, the stock has more than doubled, which compares to a 4% loss for Twitter stock.

Zuckerberg’s strategy revealed that there was huge amounts to be made from install ads. These are mobile apps that download on a user’s smartphone with a click.

Over the past few months, TWTR has been doing the same, but the results have proved wanting.  Perhaps this is why on Tuesday’s earnings call with analysts, Costolo bemoaned the issues with “direct response” advertising.

Yet this may not be an accident. Keep in mind that there is big difference between Facebook and Twitter. With Facebook, the users are authenticated and have profiles with lots of data. As for TWTR, it’s not always clear when a user is a real person! Given this, it should be no surprise that advertisers are leery of the results.

But again, Costolo’s approach will just make the situation worse. Notice lately that the user experience has gotten noisy and cluttered? Well, so has one of the company’s early investors, Gary Vaynerchuk, who recently noted that TWTR has turned into a “massive firehose.” Oh, and TWTR co-founder Evan Williams has a similar view.

In fact, TWTR is also starting to face serious competition, such as from Instagram and Snapchat. Given their rich user data and perception of being cool, they appear to be poised to grab a big chunk of available advertising revenues.

Already there are signs that the competitive pressures are taking a toll on TWTR. Consider that on the earnings call CFO Anthony Noto noted that user growth in April was “off to a slow start.”

Yes, this is definitely scary. Hey, MySpace also suffered from similar issues — and the service quickly evaporated.

In light of all this, TWTR really needs to take swift action. And this means getting a new leader who knows how to get things back on track.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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