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Amid Leadership Change, Lingering Challenges at Twitter

Slowing user growth and disappointing performance in new ad formats will continue to be a headwind as Twitter searches for a new permanent leader, writes Morningstar analyst Rick Summer.

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Dick Costolo has agreed to step down as the CEO of  Twitter (TWTR) effective July 1. Costolo will remain on the board of directors, and founder and Chairman Jack Dorsey will serve as interim CEO while the board conducts a search for a permanent replacement. Dorsey will also continue to serve as the CEO of Square, a mobile payments company. We are sticking with our narrow moat rating and $36 fair value estimate for now.

The challenges in front of Twitter, including slowing user growth and disappointing performance in new, direct response ad formats remain, and this leadership change suggests to us that the situation is not likely to improve in the short term. Our $36 fair value estimate prices in our very optimistic view (such as reaching more than 500 million Twitter users by 2017), and we believe the stock doesn't offer a margin of safety at these levels. In fact, if we are unable to see an acceleration in user growth or monetization (which we define as ad revenue per user), our current fair value estimate may prove to be overly optimistic.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.