'I don’t see how anyone could interpret this as a good thing': The departure of Twitter's No. 2 exec is going to hurt (TWTR)

Jack Dorsey

On Tuesday, Anthony Noto, the man running Twitter under part-time CEO Jack Dorsey, resigned to take a CEO role at a fintech startup.
Noto was credited for creating Twitter's growth strategy in video and was the person who knew Twitter more intimately than anyone.
This can only be seen as a bad sign for the endlessly struggling internet company, says one top internet analyst.

Rumors had been swirling for days that Twitter's COO, Anthony Noto, was talking with fintech startup Social Finance (aka SoFi) to become its next CEO.

And on Tuesday, it happened. Two weeks before Twitter will report its fourth quarter and year-end financials, the news became official. Noto resigned from Twitter effective immediately. He will begin as SoFi's CEO on March 1.

It's a move that makes sense for Noto in many ways. Noto is an ambitious former Goldman Sachs banker who was widely known to be dreaming of a CEO role.

Noto was credited for designing Twitter's most recent strategy to drive growth: its expansion into video. Most insiders thought that he was hoping to become CEO of Twitter, if cofounder Jack Dorsey ever decided to stop being a part-time CEO and focus on his other company, Square. But Dorsey has shown no signs of that and so Noto has taken his final bow at Twitter.

But the news and the timing of it, so close to the release of Twitter's year-end quarter, is not a good sign at all for Twitter, says RBC Capital's Mark Mahaney. Mahaney is one of the gurus of internet stocks, and he's been bearish on Twitter for a while.

"I don’t see how anyone could interpret this as a good thing for Twitter," Mahaney told Business Insider. "Twitter started out with a managerial hole, with the CEO part time. That gap has deepened."

Noto made it possible for Jack Dorsey to be a part time CEO

Twitter Anthony Noto As we previously reported, Noto was the reason that Dorsey could be a part-time CEO in the first place. Noto was notorious for working nearly inhuman hours as well as for being a hard-charging, opinionated executive who was both intimidating and brilliant with all things numbers.

Beyond the management hole, Noto's departure is a red flag for other reasons: it highlights the question of whether Twitter will ever find a path to growth.

There was a glimmer of hope among investors in October after Twitter's third quarter earnings. Twitter sent shares soaring when management said Twitter was on track to turn a profit in the next quarter. This, thanks to the cost-cutting measures under Noto's watchful eye. The stock had been up about 40%, above $24 a share, since that earnings report.

And yet, at the same time, Twitter reported a year-over-year decline in revenues and an admission that it didn't really have as many monthly users as it said it had. Analysts are projecting it will report yet another decline in revenue for the fourth quarter.

If Twitter was on the verge of rebound, Noto would have known

Noto is liked and respected on the Street, Mahaney says, and Noto had "the single best visibility into the fundamentals."

If Twitter was on the verge of "a big inflection point" that would make the stock jump, Noto would know it. "If he says, 'I’m leaving,' it makes you wonder if you, as an investor, should follow his footsteps," Mahaney says.

We don't know how much money Noto is leaving on the table by resigning from Twitter. But we do know that he was a very highly paid exec, mostly from stock grants. Between 2014 and 2016, Noto was granted about $100 million dollars worth of stock, on a varied vesting schedule, and he had a new set of performance grants in the wings for 2017 through 2019.

In other words, he definitely had a lot of wealth tied to the performance of Twitter's stock.

So, what will Twitter do now?

Without Noto the workhorse running the show, the board will likely face increasing investor pressure to get Dorsey to either come back full time or step aside and let them hire a CEO who will. It was already a constant topic for both Dorsey and Noto.

There's one more possibility for Twitter's future to consider. If Noto's leaving is a harbinger of things to come, and the stock drops low enough, Twitter may become an acquisition target again, Mahaney believes.

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