Twitter (TWTR) Stock: Don’t Put on Your Party Hats

Twitter (TWTR) CEO Dick Costolo will have his boxes packed and his desk vacated by the end of the month, ending a very mixed run as the head of one of the world’s top social names.

Twitter (TWTR) Stock: Don't Put Your Party Hats On Yet

While Costolo did grow Twitter into a $23 billion company, he also has reigned over a mostly unsuccessful post-IPO run that has seen shares of TWTR stock decline nearly 15%.

That, coupled with some gaffes along the way, put Costolo in the hot seat — a seat that he’s taking leave from on July 1, to be succeeded by Twitter co-founder and Square CEO Jack Dorsey … at least in the interim.

No surprise, then, that at least the initial reaction was a quick after-market jump in TWTR stock.

Well, calm down, folks. Twitter still has plenty of peril to navigate.

The Trouble With Twitter

First off, I’d be remiss not to mention that Dick Costolo’s departure wasn’t a surprise — at least to me. Just a couple of months ago, I said the CEO’s time at Twitter needed to come to an end.

You could say that Costolo lacked a vision for TWTR. Or, more accurately, you could say that he had a vision — it was just a rapidly moving target. Yes, Costolo added new features like native video capturing, editing and sharing, recaps of tweets for returning users and better direct messaging.

But these additions took away from one of Twitter’s greatest features: its simplicity.

So investors shouldn’t have been too stunned at Twitter’s sluggish user growth, which registered less than 5% on a sequential basis in the first quarter. Even worse, TWTR indicated on the earnings call that April got off to a slow start.

In fact, those missteps might be benefiting more upstart rivals including Instagram and Snapchat, which have been able to crank out strong user growth. And it’s worth pointing out that these services have clear-cut purposes and easy-to-use interfaces.

It’s things like these that bring MySpace to mind, and the fact that a social platform, however popular, can come undone quickly — something likely not lost on Twitter’s board members.

Compounding things was the fact that Costolo didn’t have a good grasp of the company — or at least how to communicate the company’s prospects to Wall Street.

Q1 results — leaked early on Twitter, for an added dose of irony — were a disaster. Earnings and revenues missed in a big way, and guidance was horrendous. Then there was Q4 2014, where user metrics were soft, and Q3 wasn’t able to wow TWTR stock holders, either.

The problem is that Twitter’s a growing company, but without someone who can properly manage expectations, the Street is going to be found wanting a lot more often than not.

What’s Next?

Twitter has formed a CEO search committee that consists of directors Peter Currie, Peter Fenton and Evan Williams. But the right fit might prove elusive.

The new chief executive will need to have a strong product background in the social space, but also will need to deal with the uncertainties with employees and customers. Such executives are a rare breed — especially those who have the experience of running a large organization, and aren’t already in a position they love already.

Jack Dorsey as interim CEO isn’t a great fit, either. He was already sacked once at Twitter (in 2008), and he’ll still have his duties leading Square to contend with, so this honeymoon would almost have to be part-time in nature.

The track record of CEO transitions at struggling online companies isn’t promising — think Groupon (GRPN) and Zynga (ZNGA), which are both trading well below their IPO prices.

So the relief rally in TWTR stock might be justified … but don’t expect much more from here.

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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