Twitter‘s (NYSE: TWTR) the action recently erupted after hedge fund Elliott Management took an activist stake of around $ 1 billion in the social media company, according to The Wall Street Journal. Elliott has appointed four directors to Twitter’s eight-person board and wants the company to hire a full-time CEO to replace Jack Dorsey, who runs both Twitter and the online payments company. Square (NYSE: SQ).

Elliott Management founder Paul Singer also expressed concerns about Dorsey’s plans to move to Africa for three to six months a year to explore cryptocurrency opportunities. However, critics have pointed out that Singer is a major Republican donor and may seek to respond to accusations of liberal bias on the platform.

Will Singer change the way Twitter does business? Or will Dorsey weather the storm and push back the activist investor, who previously pushed eBay (NASDAQ: EBAY) and AT&T (NYSE: T) make major changes?

Is Elliott right about Dorsey?

Dorsey, who co-founded Twitter with Noah Glass, Biz Stone, and Evan Williams in 2006, was initially the CEO of the company before it went public. However, Dorsey was ousted in 2008 due to complaints of poor leadership skills and a tendency to leave work early to pursue other hobbies.

Dorsey returned as full-time CEO of Twitter on October 5, 2015, after his predecessor Dick Costolo struggled to grow up the platform’s user base and advertising revenue. However, Dorsey was already CEO of Square, which he co-founded in 2009.

Under Dorsey, Twitter’s annual revenue grew from $ 2.5 billion in 2016 to $ 3.5 billion in 2019, and it generated GAAP profits over the past two years. Most of this growth has come from new advertising products, overseas growth and cost-cutting measures.

However, Twitter shares have barely advanced since Dorsey replaced Costolo as the company’s interim CEO on July 1, 2015. Square, which went public four months later, generated a return of nine bagging for its first investors.

Source: YCharts

Dorsey has tightened up Twitter business, but it’s been a bumpy ride. Twitter explored a sale in late 2016, but its suitors reportedly pulled out over concerns over the platform’s controversial content. Several of Twitter’s senior executives, including COO Adam Bain and CTO Adam Messinger, have also left the company.

Last year, Twitter replaced its standard MAU (Monthly Active Users) account with a proprietary metric, mDAU (Monetizable Daily Active Users), to eliminate disconnected users, spam, and bot accounts. The move gave investors a clearer picture of the platform’s core growth, but it also masked its stagnant MAU growth.

Twitter has also been repeatedly caught in political crossfire as politicians militarized the platform. Liberals were unhappy that Twitter failed to block President Trump’s tweets, while Tories claimed it was actively censoring right-wing accounts.

Dorsey’s own eccentric behavior – which included odd diets, daily routines, and overseas retreats – also raised concerns about her abilities to run both Twitter and Square. Therefore, Elliott’s concerns about Dorsey’s plans to live in Africa looking for crypto-currencies – which would benefit Square’s Cash application more than Twitter – are valid.

But does Twitter need a big overhaul?

Dorsey is a controversial CEO, but Twitter’s revenue and mDAU growth has remained constant over the past year.

YOY = Year after year. Source: Twitter quarterly reports.

However, Twitter’s adjusted net margin, which excludes tax benefits, fell from 12% in 2018 to 7% in 2019. It expects its margins to continue to decline in 2020 as it increases its workforce by ‘about 20% to focus on new engineering, product design, and research projects.

That’s why analysts expect Twitter’s profits to fall 62% this year as its revenue grows by around 16%. This drop in profits is not ideal, but it also indicates that Dorsey is not letting the platform stagnate. A brutal hiatus from Twitter’s board and the hiring of a new CEO could interfere with these plans and cause further problems.

The singer has sharply criticized President Trump, but his support for Republican causes suggests he could push Twitter to revisit accusations of anti-Conservative bias or open the floodgates again to political ads. These actions could drag Twitter deeper into a political quagmire and force it to rely more on foreign markets, which accounted for 80% of its mDAU but only generated 41% of its revenue last quarter.

The road ahead

Elliott’s stake is only about 4% of Twitter’s stock, so it might be difficult to replace half of Twitter’s board and oust its CEO. I doubt Elliott’s push will be successful, as Dorsey is widely credited with stabilizing the business after Costolo’s messy tenure, but it could force Dorsey to define clearer long-term strategies and succession plans for Twitter and Square.