Twitter CEO Dick Costolo Steps Down: Price Targets Cut

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Twitter sent ripples through Wall Street on Thursday when it announced that CEO Dick Costolo will step down on July 1. There have been speculations that Costolo would be out for quite some time now, as shareholders have been tiring of the company’s struggle to grow.

Immediately after making the announcement, shares of Twitter surged, although the stock has declined since then. As of this writing, Twitter shares were up 1.09% to $36.23 per share.

Wells Fargo cuts valuation range on Twitter

Analysts from a multitude of firms have released reports about Costolo’s resignation, and at least two have cut their price targets as a result of the CEO change. Wells Fargo analyst Peter Stabler and his team maintained their Market Perform rating on Twitter but trimmed their valuation range from between $42 and $44 per share to between $36 and $38.

The reasons cited were continued uncertainty on user growth and increased risk of disappointing on third quarter guidance.

Macquarie cuts price target

Macquarie analyst Ben Schacter and his team trimmed their price target on Twitter from $46 to $40 per share and maintained their Neutral rating on the stock following the announcement about Costolo. They said his resignation suggests to them that the micro-blogging platform will keep underperforming.

They added that in order to change things around, Twitter will have to “significantly improve its execution against its current strategy.” This could pose a serious problem, as interim CEO Jack Dorsey expressed their plans to “stay the course” with the current strategy under the next CEO. The Macquarie team also stated another obvious path to turning things around, which of course would be coming up with a new vision for the company.

They also don’t think Twitter’s management understands what is needed in order to regain momentum.

Implications of Twitter’s CEO transition

The Macquarie team also pointed out that usually CEOs don’t step aside if things at a company are going well. As a result, they expect investors’ confidence in Twitter to be shaken, although that hasn’t really happen yet.

They remain concerned about Twitter’s results for the second half of this year and in the long term. Further, they say visibility on Twitter’s “core fundamental financial and operating metrics” remains limited. They also question just how large the company’s total addressable market is.

All about strategy

The Wells Fargo team echoed Macquarie’s comments regarding the importance of strategy. They estimate that at least 700 million users either log onto Twitter infrequently or have left entirely. In light of management’s promise to stay the course, they question whether the company will make the changes that are necessary to bring these users back.

They emphasized that engagement rather than user growth is the key issue Twitter faces. They believe the micro-blogging platform “has yet to effectively address a steep engagement fall-off among lightly tethered users,” noting that the recent product changes haven’t addressed this.

Further, they point out that Twitter’s C-suite has seen a high rate of turnover. Among other changes, the next CEO will be the fourth in only nine years. They believe this is due to disagreements regarding strategy. If this truly is the case, it sounds like the company should be paying more attention to the naysayers who want to change strategies rather than dumping them and opting for executives willing to follow the status quo. They note that management’s comments and the fact that Costolo is staying on the board could signal that Twitter doesn’t intend to make any changes.

Will Twitter make changes?

JPMorgan analyst Doug Anmuth and his team seem to disagree with the Wells Fargo team in terms of whether major changes will be made. They see the CEO change as a long term positive that Twitter because it could result in “bigger product changes on the platform.”

CNBC’s Jim Cramer sees the CEO change as a big positive for Twitter, suggesting that now might be a good time to buy shares.

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