Why Twitter Just Got Downgraded

NEW YORK (TheStreet) - Twitter (TWTR) CEO Dick Costolo's departure was not a sign that the social media company's challenges are easing, according to a MKM Partners investor report from analyst Rob Sanderson.

Sanderson said the search for a new full time CEO will cause uncertainty and will delay the company's path to fixing a "cumbersome user experience." Sanderson and his team downgraded Twitter to "neutral" from "buy" with a target price of $39.

The report said naming Jack Dorsey as interim CEO would be positive for the company on one condition: that he step down as Square CEO.  "Relinquishing the CEO position at Square would be required" particularly with recent reports that Square is planning to either sell itself or become publicly traded, something Sanderson and his team said would require a full-time CEO. Dorsey has stated publicly that he has no intentions of leaving the top job at Square.

Shares of Twitter stock have dropped 3.4% since the company announced its leadership change on June 10.

In its most recent quarter, Twitter's revenues were up 74% year-over-year to $436 million compared to the same quarter the previous year. However, it still missed estimates according to analysts surveyed by Thomson Reuters, who expected the firm to generate $457 million in revenue.

The research report said there were no signs that the company would quickly fix its revenue and user problems quickly, unless it is true that Google (GOOG), (GOOGL) is looking to acquire Twitter. Sanderson said Google is the natural fit for Twitter since its own attempts are social networking, such as Google+, have not been successful, leaving a hole that Twitter could easily fill for the tech giant.

The company's recent collaboration with Google to show tweets in mobile search to help the company target logged-out users, which the report said management believes represents 500 million monthly visitors. Sanderson and his team said while this relationship is positive, they do not expect it to have any monetary effect on the company for at least three quarters.

Twitter has 302 million monthly active users, but Sanderson and his team said the company is struggling to get new and casual users active on Twitter. After his appointment to interim CEO was announced, Dorsey said in an interview on CNBC that he is optimistic about the company's future, especially with the success of Periscope, which it acquired for $100 million earlier this year.

"The more the product simplifies, the more the product feels straightforward, and the more we ship and execute, the more people will find value in it, and that's really what we're focused on," Dorsey said of Twitter.

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