Twitter Logo

Source: Twitter.

Unfortunately for its shareholders, microblogging platform Twitter (NYSE:TWTR) remains light years away from realizing the potential that made it one of the most high-profile tech IPOs of the past several years.

In its defense, there hasn't necessarily been much in the way of continuity among Twitter's leadership team, either. Counting Dorsey's two stints at its helm, Twitter is currently on its fourth CEO in eight years, all while attempting to create a leading media product and profitable company to support it.

Two weeks ago, in reaction to news that co-founder and interim CEO Jack Dorsey would assume the mantle of full-time CEO, Twitter's stock sold off by as much as 7.5%. However, take this to the bank: The market's initial reaction was dead wrong. Here's why.

Troubles at Twitter
Among available options, Dorsey remains undoubtedly the best candidate to help steer Twitter toward its potential, alongside social media giant Facebook, of becoming the media platform of the 21st century. The reason is simple -- Dorsey is a product visionary returning to a company stuck in the midst of a product crisis. If you had to distill its problems down into a single kernel of truth, Twitter has simply lost the ability to attract new users. Don't take my word for it:

Twitter User Growth Problem
Source: Twitter & author's calculations.

Growth at both Facebook and Twitter continues to slow with size. However, though only two years its junior, Twitter's 304 million monthly active users (MAUs) pales in comparison to Facebook's roughly 1.5 billion MAUs. The continued growth of Twitter's revenue base has allowed its average revenue per user (ARPU, green line) to continue to increase meaningfully despite the service's sluggish user growth.

However, APRU, driven primarily via advertisements, faces an upper limit constraint at some point, even if it isn't readily identifiable in this context. And facing a lofty price-to-sales ratio of more than 11x, and no discernible profits, Twitter needs new users in order to flourish into the company it wants to be.

Jack's back: The right man for the job
With somewhat of a natural advantage, Facebook enjoys far more contextual fodder in each user's profile (interests, pictures, etc.), making it simpler to create experiences and features that attract users. However, while Facebook started with social networking at its core, unlike Twitter's original vision as a status updating service, it's important to note that many of Facebook's popular features (photos, News Feed, chat) were added or evolved over time.  In this way, Facebook serves as a strong example of how savvy product development can meaningfully expand a social networking platform's appeal over time.

So how does a technology and/or media company like Twitter solve a user growth problem? It takes a leaf from Facebook's page, and adds new features that help entice people to begin using the service. And in order to do so, Twitter needs leaders that not only understand, but excel at, creating new services and features.

With Twitter, and now Square, Dorsey's reputation speaks for itself. There's something to be said about the visionary capabilities of founders, who, unlike even talented in-house product development specialists, have borne a company from distant concept into a household name.

To its credit, the market seems to have regained its senses since Thursday's plummet. Twitter's shares have risen considerably in the past several days, and rightfully so.

Although likely a calculated move to shore up confidence, Twitter has announced a number of smaller changes in the intervening days since Dorsey reassumed the full-time CEO role. Last week, Twitter unveiled a new Moments tab designed to uncover the most popular Tweets on the platform. Additionally, it also launched Amplify, an improved product for sponsoring advertisements.

While these kinds of moves certainly help on the margin, Twitter will need to take far more drastic steps in order for Dorsey's second term to prove a success.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and 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.