MARCH MADNESS: Facebook (FB) vs. Twitter (TWTR)

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It may be the closest matchup yet in this quadrant of this year’s brackets… the older, more established social networking giant against the younger, hipper social networking name.

march-madness-250No two companies in this year’s tournament are more alike than Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR), and that’s why this pairing is going to be one of the most difficult to decide.

Twitter

According to investment bank and research firm JPMorgan, Twitter shares are worth 42% more than their current price near $47.

Morgan posted an analytic update last week, pointing out how new products and features should improve the micro-blogging site’s user experience that will eventually drive more revenue … a lot more revenue. The updated outlook calls for revenue growth of 75% and EBITDA growth of 100% this year. Those are big numbers, but not out of line with 2014’s and 2013’s growth rates.

While a slowing user-base growth rate has been of concern to the market of late, what’s been somewhat underappreciated by investors is that Twitter is extracting more and more money from its users. The JPMorgan viewpoint suggested the company’s annual revenue per active user could eventually rise from the current figure of $4.75 to somewhere around $9.00 (in line with the kind of per-user revenue is presently driving) now that advertisers have figured out how to maximize the effectiveness of the Twitter site as an advertising platform.

It all sounds encouraging on the surface, underscored by the fact that Doug Kass and Jim Cramer both weighed in on TWTR, bullishly, this past week. It’s not as if the path to greater profitability isn’t without its pitfalls though.

For all the effort Twitter is putting forth to grow its revenue-bearing user base, competing and even-lower-frills communication service Instagram — owned by Facebook — now has more active users than Twitter, and it got there in much less time than Twitter did.

Almost at the same time the Instagram headcount data was published, Facebook notified the market it was establishing a mobile-advertising distribution arm that could prove to be real thorn in the side of Twitter’s near-equivalent real-time advertising bidding platform MoPub.

Point being, while Twitter may seemingly be on the right track, there are several stumbling blocks along that path that could end up being trouble for the company as well as TWTR stock.

Facebook (FB)

While most investors see Twitter as a company that’s “catching up” with rival Facebook with its efforts to extract more revenue per user, it’s a shortsighted to assume Facebook is working just as hard to make sure it says well ahead of the up-and-coming Twitter.

One of those initiatives is the aforementioned establishment of a mobile advertising entity that will focus strictly on business development. It’s hardly the only new idea Facebook is putting into motion, though. One of the other interesting efforts taking shape right now is the cultivation of a strong video-advertising platform.

YouTube is still the undisputed leader of online videos, playing 6.5 billion of them per day. What’s stunning, however, is that Facebook plays about 3 billion videos per day on user’s Facebook pages. That’s not just a huge number, but those videos also serve as an advertising platform that yields much higher advertising revenue than static advertisements generate.

Moreover, the company announced in early March that advertisers using its Instagram platform would now be allowed to insert a link back to that company’s website at the bottom of a message.

And of course, the one overarching reality that makes FB a compelling investment is its sheer size and market dominance.

With all that being said, it’s not as if Facebook is infallible.

Without Instagram, Facebook wouldn’t have much to look forward to in the way of growth … at least relative to Twitter. That’s one of the downsides of when 20% of the world’s population is already a user — there’s not a lot of room left for organic growth from that point. In fact, the bigger Facebook gets from here and the more intricate each user’s web of “friends” gets, the more overwhelming the site’s data-feed becomes for each member, and the less engaged those users are. It’s a vicious catch-22 when organic growth could potentially make your product less valuable to prospective advertisers.

Our First-Round Pick: Coin Toss

Both Twitter and Facebook have strikingly equal degrees of pros and cons. If any of this year’s matchups are likely to go into overtime, it’s this one.

We’ll call it too close to call for now, and wholly delegate the job of picking the winner to investors.

Head back to the Stock Market Madness bracket to vote for your favorite stocks and check out other previews!

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/03/march-madness-facebook-inc-fb-vs-twitter-inc-twtr/.

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