At Its Current Price, Is Twitter a Better Allocation Than Facebook?

When Twitter Inc. (NYSE: TWTR) reported its first-quarter 2016 financials, they pretty much missed across the board. A reported shift in focus, however, has a number of analysts suggesting that Twitter is at a turnaround point and, going forward, makes for an attractive investment opportunity at its current price — about a 60% discount on its initial public offering in 2013.

Twitter’s competitors in the social media and social networking space, at a glance, look to be doing far better. However, their superior performance has made them more expensive. With this in mind, is there value in a Twitter allocation, or is the more expensive Facebook In (NASDAQ: FB) (from a price-to-earnings standpoint) a better bet? Let’s take a look.

First, a quick run through the key numbers.  During the first quarter of 2016, Twitter generated $585 million revenue, of which $530 million derived from advertising. It user base — monthly active users — came in at 310 million, up slightly from the 305 million reported during the previous quarter. The company is yet to generate a net income, both on a quarterly and an annual basis, but has about $3.57 billion cash on hand (as of March 31, 2016).

So, that out of the way, and looking at things from an operational perspective, can Twitter turn around its performance and head into profitability across, let’s say, the next decade?

The short answer is probably not. From a return on investment perspective, Twitter is severely lacking when compared to Facebook. User growth is just one example. Facebook continues to expand its user base, while Twitter essentially has serviced the same group of users for past 12 to 18 months. There are more serious concerns at hand, however.
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Twitter is pretty much entirely reliant on its advertising revenues ($530 million of the $585 million revenues derived from advertising), but as management stated in its latest earnings conference, big-name advertisers are both not coming to Twitter for new campaigns and concurrently leaving Twitter to seek more experimental campaigns elsewhere.

Facebook, on the other hand, is attracting fresh advertising clients all the time, and its ad-derived revenues growth highlights this fact.

Perhaps more important for the future, however, is the uncertainty that surrounds Twitter’s business model. Its management are leaving the company to work for competitors, and while experimental operations in live video (Periscope) and sports broadcasting (NFL) are ongoing, without a bread-and-butter revenue source expansion, the company will struggle to fund its experimental approach — and perhaps more importantly, justify this funding to its shareholders — over the next 24 months.

Simply put, Facebook has outgrown the social media space to become a data, software, networking and, with its Oculus venture, hardware behemoth, and it looks set to grab further market share in all these spaces across the next decade. After a decade of operations, Twitter, on the other hand, still doesn’t have a core business model, and its lead revenue source (its advertising clients) are suffering from poor campaign results as an offshoot.

It goes without saying, therefore, that Facebook looks to be the far better allocation as things stand, even if it comes at a higher cost.

By Matt Winkler