After Declines, Is Twitter or Facebook the Better Buy?

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Twitter stock - After Declines, Is Twitter or Facebook the Better Buy?

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After the recent Cambridge Analytica scandal, social media stocks have been tumbling. Sure, Facebook, Inc. (NASDAQ:FB) has taken the worst blow. But the other names in the space are struggling as well. Twitter Inc (NYSE:TWTR) dropped 10% on the day that the Facebook scandal broke, and Twitter stock has yet to bounce since then. And Snap Inc (NYSE:SNAP) is down 10% over the past week and a half as well. All in all, investors haven’t been that discriminating in moving out of social media stocks.

Given the sell-off, is Twitter or Facebook the better opportunity now for long-term investors? I exclude Snap, since it still doesn’t have a clear path to profitability. As such, it’s more speculation than investment-caliber at this time.

Twitter has several pluses compared to Facebook at this juncture. The first is probably obvious, but still worth stating. While Twitter has plenty of problems with Russian bots, fake news, offensive content and the like on its platform, it’s not currently embroiled in multiple reputation-threatening political scandals. Facebook has numerous problems which I’ve warned about for a long-time now. Cambridge Analytica was the straw that broke the camel’s back, but close observers of the platform saw it running into trouble soon after the election.

Twitter Stock Has Fewer Political Problems

Sheryl Sandberg made a grave error last fall in repeating Facebook’s talking point that it is not a “media company” and that “We hire engineers. We don’t hire reporters.” Facebook kept trying to maintain the illusion that it was just a third party hosting other people’s content. But when your platform is so large and powerful as to potentially swing the Trump election and Brexit vote, you can’t claim innocence when bad actors take advantage of your lax oversight to spread manipulative content.

Facebook should have immediately begged for the public’s forgiveness and taken dramatic corrective action when the first signs of this scandal. Instead it dithered, waiting for a bombshell to hit. Now it’s likely to face massive fines and dramatic regulatory interference into its business going forward.

Twitter, by contrast, has an imperfect record on moderating its platform, but it gets points for at least trying. The company has repeatedly swept the platform. These sweeps have banned fake users, bots, and profiles that cross the line on violent or threatening comments. Twitter also has a more subtle advantage versus Facebook. People often go to Twitter for politics and other topics they know will be controversial. Users are more willing to be offended. Most people see Facebook as a site for friends and family stuff. So when that information is twisted to interfere with elections, it comes off as much more disturbing and nefarious.

Twitter Stock Has More Potential Upside

Finally, on a financials point, while Facebook is much cheaper on an earnings basis, Twitter remains several ticks cheaper on the price/sales ratio. If Twitter is able to steal even a percentage point of internet marketing share from Facebook due to this scandal — it’s currently Google 32, Facebook 20, and Twitter  about 4.5 — then Twitter stock would have to rise close to 50% to reach the same price/sales level as Facebook.

Also, it’s worth remembering market cap. Facebook, even after its recent decline, is still at nearly half-a-billion dollars. Twitter stock, by contrast, supports a mere $23 billion market cap. That makes it small enough to be an easy acquisition for a larger tech or media company. Additionally, if Twitter is able to steal major share from peers, Twitter stock could quadruple before hitting even a $100 billion market cap. By contrast, Facebook stock can only double before becoming the world’s first trillion dollar company. Simply put, Twitter stock has way more potential if things go well.

Facebook Stock Has Scale

Admittedly, Facebook’s handling of this public relations crisis has been inept so far. But it has a gigantic $42 billion cash reserve that will more than defray even the worst possible regulatory fines. And the company’s advertising business, unlike Twitter, throws off mountains of cash. Facebook is still an entrenched global platform. Even a major #deleteFacebook campaign in the United States would only cause a modest hit to the company’s profitability.

And, unlike Twitter, Facebook is broadly diversified, with Instagram, WhatsApp, and its virtual reality business. I’ve long been skeptical of the durability of Facebook — the platform. It was already trending toward a “only my grandma uses that” sort of reputation among teenagers anyway. However I, and many analysts, underestimated just how fast Instagram and other operations were growing even as the namesake platform matured. Even if Facebook, the platform, goes into outright decline, there’s no sign that the overall user numbers or ad revenues would drop.

It’s also worth considering that Twitter has struggled at growth. Mightily. Over the past five years, Twitter has grown revenues at a compounded 4% rate. That’s terrible for a tech company. Facebook, by contrast, grew revenues at a compounded rate of 43%.

Facebook Stock Has Better Growth Record

While Twitter’s growth over the past few quarters could be a sign of a new era, I’m still not convinced it isn’t just a fad. Trump’s mischievously effective usage of that platform has given Twitter a public spotlight unlike any other. But will it last once Trump is out of office? I suspect many of us in the investment world overrate Twitter’s investment prospects because we use the platform all day ourselves. But don’t make the mistake of thinking that our niche is representative of the population as a whole.

Give credit where it is due. Two years ago, Twitter looked like a company that would never turn a profit. Now it is clearly profitable, and is at a forward price-earnings ratio of 44, if analyst expectations for this year are met. That’s not bad at all. But is the growth durable, or TWTR just catch a few good quarters?

On the other hand, Facebook remains the dominant leader in the social media space, even if its top platform takes a deeper-than-expected-hit from this scandal. And at 21x forward earnings, Facebook stock is looking mighty cheap for something that analysts expect to grow earnings of at least 25% per year compounded for the next five years. While Twitter stock may make a good trade here on the FB selloff, Facebook stock seems like the much better option for the long-term investor.

At the time of this writing, the author held FB stock and had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/after-declines-twitter-twtr-stock-or-facebook-the-better-buy/.

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