Twitter Inc (TWTR) Stock Looks Set For More Pain Ahead

Twitter's executive exodus could hurt TWTR stock investors further in the coming months, potentially also denting Twitter's chances of turning a profit in 2017.

Patrick Moorhead, a prominent voice on the tech industry couldn't have put it better when he said that Twitter (NYSE:TWTR) has been a revolving door for executives. The list of executives who have left Twitter this year was already a long one, and it just got longer with the addition of two more names. The latest top execs to announce their departure, are Twitter's CTO Adam Messinger, and VP of product Josh McFarland.

Adam Grossman of Middleton & Company highlights that this exodus is an indication that outgoing executives don't think Twitter is anywhere close to turning the corner. It's an explanation you can't rule out, even though optimists may not agree. What's almost certain though, is that these incessant exits will hurt investors, not just in terms of the negative sentiment they fuel, but also in terms of the financial ramifications that come with these seemingly endless exits.

Who's Leaving This Time, And Why You Should Care

The exit of ex-COO Adam Bain in November, who was seen by some as "the most competent person at Twitter", seems to have sparked off a fresh round of exits at the company. Bain, who was credited with building Twitter's multi-billion Dollar advertising business, had been with the company for close to 6 years, and was seen by some as ex-CEO Dick Costolo's successor, after the latter's controversial exit. Less than a month after Bain's exit, Twitter's VP of global online sales, Richard Alfonsi announced his departure. McFarland, who announced his exit via a string of tweets earlier today, was  heading advertising product development. Quoting from a report on the NY Times.

"Mr. McFarland, who oversaw much of advertising product development, had joined Twitter in April 2015 when Twitter acquired his company, the digital advertising platform TellApart, for about $500 million. Mr. McFarland was a rising star at Twitter; he was respected for being decisive and willing to have hard conversations, former Twitter employees said."

It's not very clear how the hierarchy goes at Twitter, but it's possible that Twitter's decision to hire Keith Coleman - who had tweeted just 143 times before being elevated to the post of Twitter's head of product - led to the departure of McFarland, who was also a VP of product at the microblogging site. Not to question the wisdom, but the sequence of events does sound oddly funny, as described by Nick Statt on The Verge:

"Despite being the chief of a tech startup, Coleman has tweeted just 143 times. That would be reasonable if he hadn’t joined Twitter in June of 2007. In fact, there’s about a seven-year gap in his timeline, starting in November of 2007 and lasting until a retweet of The Verge’s own Walt Mossberg in 2014. It’s followed by a second retweet and then another two tweets in the entirety of 2015."

Ironically, both Coleman and McFarland joined Twitter by virtue of its acquisitions. The other exec to exit Twitter, CTO Adam Messinger, will be replaced by the company's VP of engineering Edward Ho, who until recently, was also intermittently handling the post that Coleman eventually filled up. (Also See: Don't Sell TWTR Stock, But Do Read This)

So Why Should Investors Care?

There are two reasons why investors should care, one more obvious, and one, a little less. As Adam Grossman of Middleton & Company rightly highlighted, stock options form a big part of the compensation for executives of companies based in the Valley. He makes the compelling argument that not as many executives would quit if they thought the stock price was headed higher. The recent exodus, he believes, is a reflection of the perception that Twitter is nowhere near turning the corner. And while a lot of Twitter investors are still pounding the table for a buyout, these mass exits suggest that a deal may be much farther from fruition than rumor mills have led investors to believe over the past few months.

In this context, Patrick Moorhead tables an argument that's hard to refute. While Moorhead does believe that "Twitter's ultimate spot is going to be inside of another company", he raises the valid concern that Twitter might be a tad too big for that to happen right now. Start-ups have to either grow really big, or remain relatively small, for them to be attractive buyout targets. Moorhead rightly points out that, at this point of time, and at these valuations, Twitter is awkwardly placed between those two ends of the spectrum.

Last but not the least, the rather frequent changes in key personnel have a very real impact on shareholders. Going back to the point that Grossman makes, most top execs in the Valley are compensated with generous amounts of stock options, and these constant rejigs only push those costs higher. For instance, Twitter's CFO Anthony Noto, who is due to take over as COO after Bain's exit, was offered an additional $12 million in stock, a cost which wouldn't be incurred in the normal course. Stock based compensation has single handedly denied Twitter the distinction of being a profit making company.

Also Read: The Good And Bad Of Buying Twitter Inc Stock Right Now

To put things into perspective, since going public, Twitter has accumulated GAAP net losses worth $1.9 billion, significantly lower than the company's $2.3 billion spent on stock-based compensation. In effect, this constant reshuffling of top executives is likely to derail Twitter on its path to profitability, something it aims to achieve in 2017. Another goal that Twitter was vocal about was to curb its stock based compensation expenses. And it seems increasingly likely that developments like these won't allow Twitter to chase the goals they've committed to.

Twitter's finances aren't really going anywhere. There's no flattering growth to speak of. Neither is the company profitable. And with stock based compensation poised to stay where it was, more equity dilution means that investors are effectively holding onto a shrinking share of the pie. Looking for great tech stocks? Check out Amigobulls' top stock picks, which have beaten the NASDAQ by over 111%.

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

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