If Twitter Inc (TWTR) stock investors weren’t listening in on Facebook Inc’s (FB) fourth-quarter earnings call, they probably missed this comment from COO Sheryl Sandberg that should get their hearts beating a bit faster.
“Real-time sharing is an increasingly important part of the platform and one we’ll continue to invest in.”
Twitter stock investors may have heard that phrase, “real-time,” before. TWTR management is fond of describing its flagship product as a “real-time information network.” Indeed, Twitter’s biggest differentiating factor is the timeliness of the content on its network.
So if FB continues to invest in timely content and information, as Ms. Sandberg said it would, Twitter might become redundant.
And Twitter stock might be in serious jeopardy.
Facebook Stock Still Has Room to Grow
Until recently, massive real-time communication was the sole domain of TWTR. A Pew Research poll found that while the same percentage of users got their news from Twitter and Facebook, nearly twice the percentage of news readers followed breaking stories on Twitter compared to Facebook.
But Facebook is now making efforts to change that behavior. Last summer, it gave journalists the ability to live-stream video from their smartphones. In December, it extended that feature to all iPhone users in the U.S. with plans to roll out the feature to everyone eventually. Last month, FB introduced Sports Stadium, which allows the 650 million sports fans on Facebook to follow the action of a game while seeing commentary from their friends and experts.
As Facebook rolls out more real-time features to its audience, it will become harder and harder for Twitter to attract new users and retain its existing user base, limiting its ability to grow users.
If TWTR ever reports a decline in active users, Twitter stock would be punished heavily than it already has been.
Conversely, FB would benefit from co-opting Twitter’s strength. Real-time information gives users one more reason to stay on Facebook, following events as they unfold. Management already claims to command 20% of time spent on mobile between its flagship product and Instagram. Adding real-time sharing into the mix could help FB increase that number, boosting revenue opportunities for Facebook stock investors.
FB Has the Means to Take Out Twitter
Even with its multibillion-dollar acquisitions, Facebook is producing positive free cash flow. In 2015, FB produced more than $6 billion in FCF.
In other words, Facebook can afford to invest a lot more in research and development to produce more and better real-time sharing applications.
Twitter, meanwhile, is limited by its revenue as to how much it can invest in R&D; it’s already investing 39% of revenue that way. Also, in 2014, S&P assigned Twitter’s debt issue a rating of BB- — junk status. So if Twitter plans to compete with Facebook, it’ll have to do more with less.
With Facebook’s sights set on real-time sharing, TWTR must quickly become the place for people to go for updates on news and entertainment. FB has the means to create a platform that can at least compete with Twitter, and it has a built-in audience to promote it to. It’s already doing several experiments and rolled out a couple of major features around real-time sharing.
Facebook stock investors are now expecting more to come thanks to the COO’s comments.
Meanwhile, the clock is ticking for Twitter stock investors, and I’m not so sure management will be able to fix its product and user growth problems in time or in budget.
As of this writing, Adam Levy did not hold a position in any of the aforementioned securities.
