Twitter (NYSE:TWTR) recently named co-founder Jack Dorsey as its permanent CEO. Dorsey took over as interim CEO four months ago when Dick Costolo abruptly resigned, but there were doubts that Dorsey would stay since he was also the CEO of online payment company, Square.
Dorsey put that speculation to rest in a recent investor call, declaring that he would "do whatever it takes" to get Twitter back on track. In a storm of tweets, Dorsey called Twitter "the most powerful communications tool of our time" and stated that he would "make Twitter easy to understand by anyone in the world, and give more utility to the people who love to use it daily."
On Oct. 1, Twitter stock plunged over 8% after media outlets stated that Dorsey's appointment was "imminent". But when Dorsey officially accepted the position on Oct. 5, the stock surged more than 7%. Those volatile price movements indicate that investors remain sharply divided regarding Dorsey's ability to save Twitter, which has lost half its market value over the past 12 months. Let's clear the air by discussing the pros and cons of Dorsey's appointment.
First, the bad news ...
Dorsey originally served as Twitter's CEO in its start-up days and led the company through two rounds of capital funding. But in 2008, Dorsey was ousted and replaced by co-founder Evan Williams. Dorsey was reportedly dismissed due to weak leadership abilities and a tendency to brush aside work for outside hobbies.
Dorsey has returned as a "transformed man", according to CNBC, but he'll still have to prove that his leadership abilities have been sharpened by his time at Square. Twitter needs a firm hand to guide it, since Dorsey's predecessor Dick Costolo was also widely criticized for his questionable leadership abilities. Moreover, if Dorsey is unable to balance his time effectively between Twitter and Square, both companies could suffer. It's been seven years since Dorsey led Twitter, and it was Costolo -- not Dorsey or Williams -- who made the company IPO-worthy with meaningful revenue growth.
In the four months that Dorsey served as interim CEO, not much has changed. Twitter's "direct response" strategy still stands, which lets advertisers only pay for "desired" interactions like gaining new followers or conversions on a website. Costolo thought this model would attract more individual advertisers with a wider range of prices, but it simply let existing advertisers pay less for fewer clicks. That's why Twitter only expects to post around 60% annual sales growth this year -- down from 111% growth in 2014. Twitter rolled out new advertising options for app developers in July, but they basically extended the direct response model to app-install ads. Dorsey also hasn't done much to address stagnant monthly active user (MAU) growth -- which grew at its slowest year-over-year rate since its IPO last quarter.
Now for some good news ...
But that's not to say that Dorsey can't help Twitter evolve. He strongly believes that "Project Lightning", which lets users curate event-based content with tweets, photos, and videos to create "stories" can spur user growth. By integrating that platform with live videos on Periscope and six second videos on Vine, Twitter might transform into a more content-rich platform.
JPMorgan analyst Douglas Anmuth recently told investors that he was "optimistic on Lightning's potential to attract new users to the platform through curation, better organization of content, and a live feed." Twitter is also thinking about removing its archaic, SMS-tethered 140-character limit (which was originally Dorsey's idea) and finally letting users post longer tweets, which would complement the removal of the same limit on direct messages in August.
By combining those improvements with other new features like online payments, e-commerce initiatives, group chats, live events integration, and video editing tools, Twitter could become a more streamlined and cohesive platform. Speaking to employees, Dorsey said that his goal was to serve as "an editor" who edits the new features on Twitter into "one cohesive story". That story could make Twitter less obtuse and more approachable for new users.
There's no solid proof that Project Lightning will help Twitter gain more users, and Dorsey could have a tough time balancing his responsibilities as CEO of two different companies. However, I won't judge Dorsey until I've seen what he can do, but he must tackle Twitter's core problems of sluggish MAU growth and weak direct response ads before the company can start winning over investors once again.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.