What Does Twitter Inc CEO Jack Dorsey's Nice Gesture Mean For Investors?

By Tim BruggerFool.com

After Twitterbent its own clearly stated rule that whoever takes over the permanent CEO position following Dick Costolo would need to be full-time, the board of directors brought co-founder Jack Dorsey back into the fold. Investors seemed duly impressed, driving Twitter's stock price up amid the excitement of getting Dorsey back, full-time or not.

More recently, Dorsey made headlines again, but this time for a philanthropic gesture to the internal Twitter faithful: Dorsey shot a tweet out on Oct. 22 announcing that he'd be giving more than a third of his stock to an employee equity pool. Twitter's stock price jumped nearly 4% by the close of the following day.

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But does giving an ownership stake back to employees -- as nice a gesture as that is -- really change Twitter's fundamentals and warrant buying its stock? For some investors, apparently, it did. But as Twitter shareholders are learning the hard way as its share price nosedives following the release of Q3 financial results on Oct. 27, everything eventually comes back to results.

You're welcomeIn the now famous tweet, Dorsey wrote "I'm giving 1/3rd of my Twitter stock (exactly 1% of the company) to our employee executive pool to reinvest directly into our people." Within moments, Dorsey's kind gesture was retweeted and liked literally thousands of times.

And why not? One-third of Twitter is worth about $200 million: not a bad day for those employees still around following the recent decision to cut about 8% of the workforce. The employees of Dorsey's other company, the soon-to-be publicly traded Square, were also the beneficiaries of a similar act of kindness. The fact that both of Dorsey's charges -- Twitter and Square -- are better known for under-performing in key areas, including user growth and profits, respectively, seems to get swept under the rug.

That is, at least, until quarterly financial results are revealed.

Then reality set inThe good news for Twitter shareholders was that it surpassed analyst estimates for both revenue and earnings last quarter, generating $569 million in sales and $0.10 a share in non-GAAP (excluding one-time items) earnings. Unfortunately, the good news stops there.

One of the more closely watched figures for both investors and industry pundits continues to be Twitter's anemic monthly average user (MAU) growth; and once again, it disappointed. After removing the impact of the pseudo-users that sign up via text, MAUs climbed a paltry 8% year-over-year, and just three million sequentially.

To put that into perspective, Facebook announced it had jumped to 1.49 billion MAUs in the second quarter, a 13% increase from 2014 -- and don't be surprised to see more of the same when it announces Q3 results on Nov. 4. In other words, Facebook has about five times more MAUs than Twitter, and is still growing at a faster rate. Fair or not, comparisons with Facebook are inevitable, and rarely positive for Twitter.

Adding insult to injury was Twitter's fourth quarter forecast of $695 million to $710 million in revenue, which was below what investors and pundits alike had hoped for. The nearly instant response was an after-hours sell-off that sent Twitter shares reeling.

What was that again? In an example of the short-term memory challenges of some investors, many seem to have forgotten that one of the reasons Dorsey was removed from Twitter's CEO post in 2008 was his rumored use of the media to plant stories to further his personal agenda and manipulate public sentiment. Naturally, there were other reasons he was ousted by Twitter's board, but making splashy moves like giving away large ownership stakes to employees is very Dorsey-like.

Dorsey's gesture is little more than window dressing, as Twitter shareholders are learning the hard way following yet another rough quarter. When all is said and done, giving back to employees -- whether to foster goodwill and inspire folks, or simply for kudos -- is a kind gesture, but no reason to buy Twitter stock. Until Dorsey can show some tangible results, Twitter warrants little more than a spot near the bottom of an aggressive investor's watch list.

The article What Does Twitter Inc CEO Jack Dorsey's Nice Gesture Mean For Investors? originally appeared on Fool.com.

Tim Brugger 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.

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