Shares of Twitter (TWTR) rose 3% on Nov. 14 after activist hedge fund Jana Partners revealed a new 2.95 million share stake in the struggling social network. The $56 million stake accounts for just 0.4% of Twitter's outstanding shares, but Jana is known for slowly building big positions to force big changes.
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Jana usually tries to force splits and spinoffs. It previously pressured agricultural giant Agrium to spin off its retail division, and wanted mobile chipmaker Qualcomm (QCOM -0.83%) to split its chipmaking and licensing businesses into two separate companies. Neither of those efforts worked, but similar proposals at companies like McGraw-Hill and ConAgra were eventually accepted. Could Jana pressure Twitter to make similar changes?
Possible reasons for Jana's investment
Jana hasn't publicly declared its intentions for Twitter yet. However, it could push the social network to try to sell itself again. Over the past few months, reports indicated that Disney, Salesforce (CRM 2.52%), and Alphabet's (GOOG 0.18%) (GOOGL 0.13%) Google all considered buying the social network. But those potential suitors walked away, and Twitter stock plummeted.
Jana might force a leadership change. CEO Jack Dorsey, who returned last October to lead the company he co-founded, remains the CEO of online payments company Square. With his time split between two companies, it's tough for Dorsey to lead Twitter through its current quagmire of problems. Many major executives have also resigned over the past year -- including the company's chiefs of media, engineering, product, and consumer product, as well as longtime COO Adam Bain.
Jana could also pressure Twitter, which remains unprofitable on a GAAP basis, to cut costs more aggressively. Twitter has already tried to cut costs by laying off employees and shuttering dying platforms like Vine, but its stock-based compensation (SBC) expenses still gobbled up 26% of its revenues last quarter. Achieving GAAP profitability could lure back investors.
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Lastly, Jana might push Twitter to shift the focus to its oft-overlooked data licensing business, which sells streams of tweets directly to companies and news agencies. Revenue from that business rose 26% annually to $71 million last quarter, completely outpacing the growth of its core advertising revenue, which rose just 6% to $545 million.
Institutional investors still believe in Twitter
Twitter's insiders haven't had much faith in the company, selling about 257,000 shares in the past quarter without buying a single share. But many big institutional buyers still seem to believe in Twitter.
Based on their most recent 13F filings, 63 institutional investors started new positions, while 66 sold their positions in Twitter over the past quarter. 243 of Twitter's existing institutional investors accumulated more shares, 225 sold some shares, and 82 didn't make any changes to their positions.
Vanguard Group is currently the largest institutional investor with a position of 33.9 million shares, followed closely by Morgan Stanley with 33.1 million shares.
But let's not get ahead of ourselves...
Jana's investment in Twitter is encouraging, but it could also mean nothing. In the same filing, Jana revealed that it took new positions in Viacom and Kate Spade while selling its stakes in Microsoft and Walgreens Boots Alliance. Therefore, Jana's small position in Twitter doesn't necessarily indicate that it will take on an activist role to force big changes.
Looking ahead, the three main headwinds for Twitter are its weak user growth, sluggish ad revenue growth, and a scattered strategy which is floundering against advertising giants Google and Facebook. There's no guarantee that an activist stake, no matter how large, can fix any of these issues.
