It was the best of times, it was the worst of times. At one end, you have Facebook Inc (NASDAQ:FB), the social media behemoth which continues to post robust user growth, 40% to 50%-plus revenue growth, 70%-plus earnings growth, and whose stock keeps making fresh all-time highs. At the other end, you have Twitter Inc (NYSE:TWTR), Facebook’s greatly neglected little brother with flattish user growth, negative revenue growth, huge net losses, and a stock that will be lucky to ever get back to its IPO price. The social media space really is a tale of two cities right now.
As much as I love to play the contrarian, the contrarian position just doesn’t make sense here. Facebook keeps getting bigger and more dominant. Twitter keeps fading into the background.
I recently put out a piece on why FB is my favorite stock for the next 5 years. As for TWTR, it is one of my least favorite stocks for the next 5 years.
Here’s why.
Twitter Isn’t Growing, But It Should Be!
My bearish thesis on TWTR boils down to one thing.
In the golden era of digital advertising spend, TWTR has failed to grow revenues. When this golden era ends, what happens then?
More likely than not, the bottom falls out. And TWTR stock plunges.
To be clear, this really is a golden era for digital advertising. As content consumption has gone from a television to a computer to a phone, advertising dollars have likewise shifted from traditional to Internet-based mediums.
That is why the digital advertising space grew by 20% last year. That is also why this space is expected to grow in the double-digit range for the next 5 years.
But that growth has become more selective. Back in the early 2010’s, every social media platform was selling advertising space. And lots of it.
Not anymore.
Look at TWTR’s advertising revenue growth numbers. Advertising revenue growth has fumbled from triple-digit growth in 2014 to low-teens growth in 2016. Advertising revenues are actually down by about 10% so far in 2017.
But everyone else continues to enjoy a whole bunch of advertising growth.
Facebook’s advertising revenue grew 47% year-over-year last quarter and 51% the quarter before that. Alphabet Inc (NASDAQ:GOOG) advertising revenue jumped 18% higher last quarter. Trendy upstart Snap Inc (NYSE:SNAP) has seen revenues triple so far this year. Before it was acquired by Microsoft Corporation (NASDAQ:MSFT), LinkedIn Corp (NYSE:LNKD) was reporting advertising revenue growth rates in the 20% to 30% range.
The party isn’t over. TWTR just got kicked out of the party a few quarters ago.
Bottom Line on TWTR Stock
As this digital advertising space continues to grow, growth will become more consolidated among the top players. That is because big consumer goods companies will become more selective with their digital ad spend.
Right now, those big companies are still in the “testing out” phase. They are sprinkling some ad dollars to Facebook, some ad dollars to Instagram, some ad dollars to Snapchat, and some ad dollars to Twitter.
Eventually, they will come out of that phase. They will know which platforms are worth the ad dollars and which are not.
This is already starting. And the writing is on the wall. FB and GOOG are great places to advertise (hence positive ad revenue growth). TWTR? Not so much (hence negative ad revenue growth).
The number of big companies that realize this will accelerate over the next several quarters. The result will be accelerated ad revenue declines for TWTR.
Despite this bleak outlook, TWTR stock still trades at 50.5-times next year’s earnings estimate. FB stock trades at only 26.4-times next year’s earnings estimate.
The takeaway? Buy FB, sell TWTR. It has worked for some time, and will continue to work into the foreseeable future.
As of this writing, Luke Lango was long FB and GOOG.
