Twitter (NYSE:TWTR) is trading almost 40% below its IPO price due to sluggish user growth, stagnant sales growth, non-existent profitability, and aborted takeover talks. But all those headwinds didn't stop co-founder and CEO Jack Dorsey from scooping up another $7 million in shares.
Dorsey purchased about 426,000 shares in mid-February, at prices between $15.87 and $16.53. Dorsey disclosed the big purchase in a tweet with the hashtag #LoveTwitter and a link to the SEC filing. Should investors interpret Dorsey's "love" for Twitter as a bullish sign for the long-suffering stock?
How much does $7 million matter to Dorsey?
$7 million is a massive fortune for average investors, but it's pocket change for Jack Dorsey, who has an estimated net worth of $1.44 billion. Dorsey also didn't have to dip far into those pockets to get that $7 million: since the beginning of the year, Dorsey sold over $11 million in shares of Square (NYSE:SQ) -- the online payments company where he also serves as CEO -- as part of a pre-scheduled trading plan.
Dorsey now holds 15.5 million shares of Twitter, for a total of nearly $254 million -- so roughly 20% of his net worth relies on Twitter's future growth. That increased stake could also mean that Dorsey's trying to show investors that Twitter has bright, long-term prospects beyond temporary takeover-fueled rallies -- so buyouts might be off the table.
What do Twitter's other insiders and investors think?
Over the past 12 months, insiders sold 7.99 million shares but only bought 2.23 million shares. Under Dorsey, Twitter has also seen a massive outflow of top executives -- including its media chief, media and commerce chief, engineering chief, human resources VP, business development chief, consumer product head, its India and China heads, COO Adam Bain, and CTO Adam Messinger. Those factors clearly indicate that insiders aren't too confident in Twitter's growth prospects.
To make matters worse, Twitter relies heavily on stock-based compensation to pay its employees. That expense makes Twitter unprofitable on a GAAP basis -- since SBC gobbled up 24% of its revenues last year -- and continuously dilutes the value of existing shares.
Big investors are also shunning Twitter. Twitter's institutional ownership has fallen to just 45%, which is much lower than Square's 79% ownership and Facebook's 70% ownership. Dorsey might be confident in Twitter's growth prospects, but insiders and big investors clearly aren't.
Can Dorsey turn the company around?
The reception to Dorsey's return as CEO in late 2015 was mixed. Dorsey was Twitter's co-founder and former CEO, but he was fired in 2008 due to his pursuit of outside interests on company time, poor communication with investors, and personal clashes with co-founder Evan Williams. At the time, the bulls believed that Dorsey's return would be a "Steve Jobs moment" in which a humbler and wiser founder returned to save the company he built.
That didn't happen. Dorsey's main turnaround product, a curated page of tweets called "Moments", flopped against Facebook's Instagram Stories and Snap's Snapchat Stories. Dorsey also didn't adequately address common complaints about Twitter -- like its non-threaded replies, archaic use of character limits, bullies, and spam and bot accounts.
Instead, Dorsey slashed the company's workforce, killed off its niche platform Vine (but retained the camera in its main app), and sold its development tools to Google -- all short-sighted moves focused on boosting Twitter's profitability instead of ensuring its long-term growth. He also secured high-profile live streaming partnerships with major content providers like the NFL, but it's unclear if those moves will bring in new users.
The key takeaway
During last quarter's conference call, Dorsey called 2016 a "transformative year" for Twitter -- but many investors will argue that those "transformations" are taking the company in the wrong direction. In my opinion, the only way for Twitter to truly transform is for Dorsey to leave Square or hire a full-time successor.
Dorsey has done a much better job "transforming" Square, which upgraded its dashboard, invoice, and payroll services, integrated its platform with more third party apps, and tethered smaller businesses to its ecosystem with small loans. Those moves generated double-digit sales growth for Square over the past four quarters and narrowed its net losses.
Those are the things that Dorsey needs to be doing for Twitter. Buying $7 million in shares was a good start, but he must back up that purchase with big moves to get the company -- which posted less than 1% annual sales growth last quarter -- back on track.