Twitter Inc (TWTR) and Facebook Inc (FB) are both having bad weeks, but that could be good news for investors. After all, the point is to buy low, and both Twitter stock and Facebook stock are a lot lower now than they were just a few days ago.
Twitter stock is off 13% since Monday, hurt by quarterly earnings that showed slower user growth. Facebook stock is down 7% on earnings because it lowered its revenue forecast and warned Wall Street that expenses will skyrocket.
Twitter and Facebook stock both trade at very high multiples on a forward earnings basis. Bulls justify those premiums by pointing to TWTR and FB’s red-hot earnings growth.
The bulls might very well be right, but in the short term, such stretched valuations set these stocks up for steep drops when the news turns against them. That accounts for part of shellacking in Twitter and Facebook stock.
Whether the fundamental thesis on these names has changed in light of quarterly earnings is a tougher question. There are precious few stocks with the growth potential of TWTR or FB. That’s why investors are so keen on these names — and why anyone betting broadly on social media plays would hold both Twitter and Facebook.
But if you could own only one and had to chose, which stock holds the edge. Here are some of the pros and cons for both TWTR and FB:
On the face of it, Twitter earnings looked solid when the company reported earlier this week. Revenue more than doubled to $361 million, with mobile ads accounting for about 85% of the total. Twitter also saw lots of strength in foreign markets, with revenue up 176% to $121 million. Twitter even swung to a profit of a penny share; last year it lost 48 cents a share.
However, as InvestorPlace writer Tom Tauli points out, Twitter didn’t do much to wow the Street otherwise. In fact, it even let loose some things Wall Street absolutely doesn’t want to hear.
For example, earnings only matched analysts’ average estimate, and revenue beat by only a small margin. Guidance was uninspiring, too, landing in the middle of Wall Street’s range.
But the real killer was a slowdown in growth.
When it comes to adding monthly active users (MAUs), Twitter is slowing down sharply — and user growth is the single most important factor driving Twitter stock. As analysts at Bernstein Research wrote in a note to clients:
“We saw sequential deceleration of both domestic and international MAUs. We believe that to see upside in the stock, long-term investors need to believe first and foremost on a reacceleration of user growth or on a very aggressive monetization and [average revenue per user] trajectory.”
On the plus side, TWTR is figuring out how to monetize its users with ad formats for mobile app installs and videos. Those categories are seeing tremendous growth, but they will take a while to show up in the results.
Facebook stock is coming down hard from an all-time high set right before its earnings report. Like TWTR, Facebook earnings were perfectly fine on the face of things, but the market likes to dig into results until it finds something wrong.
Earnings nearly doubled to $806 million, or 30 cents a share, from $425 million, or 17 cents a share last year. And on an adjusted basis, FB earnings beat Street estimates by 3 cents a share, which is more-than-decent upside surprise.
Revenue, however, only matched analysts’ average forecast, and the outlook was even more disappointing. For the current quarter, FB sees the top line growing to $3.62 billion to $3.8 billion, vs. the consensus estimate of $3.73 billion.
Most damaging was what FB said about costs. Expenses will rise by 45% to 50% this year, up from a prior guidance of 30% to 35% growth. Next year will be even more costly, as Facebook forecast a jump in expenses of 55% to 75%.
Concerns over rising costs added to some other troubling developments for Facebook. Although average ad prices rose 274%, ad impressions dropped by nearly 60%. And payments volume coming from video games actually declined for the first time ever, dropping 2% as users move away from Facebook on the desktop.
The Street is likely being shortsighted about rising costs. After all, most of the spending comes from investments in ad technology as users shift to mobile from the web.
Yes, that will take time to pay off, but the increase in impressions should more than earn back what FB put in.
Facebook and Twitter stock both suffer from very high expectations. Indeed, they may be impossibly high. Anything less than beat-and-raise results in all key categories — profit, sales, user growth, etc. — gives the market an excuse to sell. That’s just how it goes, no matter how bright the future.
Twitter stock is essentially flat for the year-to-date but as it monetizes its platform that will surely change. In anything, TWTR should be a fountain of income, and that will surely show up in the stock even if users growth continues to moderate.
Facebook, meanwhile, will start to see huge benefits from its switch to mobile ad tech. Mobile is where users are going, so it has no choice, but it’s ultimately good news for results. Mobile ad tech is much more accurate than cookie-based web platforms.
And yet as bright as the future might be, both stocks look mighty expensive by forward earnings. On that basis, FB is the better bet if only because it’s cheaper than TWTR.
It’s also important that Facebook is very much the entrenched player with a solid track record of monetizing its platform. Twitter is still very much of a show-me story.
Given the lower valuation and investments in mobile ad tech and proven record of leveraging such investments into profits, Facebook stock gets the nod over Twitter stock — at least for now.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.