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Is Twitter (TWTR) a Better Stock than Facebook (FB) Right Now?

Facebook Inc FB and Twitter Inc. TWTR are big names in the social media space. While Facebook with its 1.59 billion users has become the leading social network in the world, Twitter has evolved into a very influential medium for self-expression. Notably, both the companies have been around for just a little over a decade.           

Wall Street had high hopes for both after the companies went public. Though Facebook emerged from its bad days, Twitter is still struggling.

However, the last few days have been relatively better for Twitter. Close on the heels of MasterCard MA hinting at a potential collaboration with Twitter, reports surfaced that the micro blogging site had clinched the rights for NFL streaming. Shares gained over 6.7% in the last two days. The bullish sentiment was enough to push Twitter to a Zacks Rank #2 (Buy).  Facebook is a Zacks Rank #3 (Hold) stock at present.

So does that make Twitter a better stock than Facebook? Let’s find out.

Audience & Growth Prospects

Facebook boasts 1.59 billion users with both MAUs and DAUs having crossed the 1 billion-user mark. In comparison, Twitter’s user base stands at 320 million. Stagnating user base remains a key area of concern for investors.

In order to attract more users while fully monetizing the existing ones, the company has been implementing a lot of changes. Anew way to display tweets was introduced, live video streaming app Periscope was integrated in its feed and the star icon that stood for favorites was replaced by a bright red heart shaped button for likes.

Moreover, Twitter would now make tweets available on Google search to woo the 500 million users who do not log in but keep a track of tweets. Last December, the company launched ads for logged out users. Earlier, its news curation tool, Moments, was a step in the same direction.

There are pretty big events lined up for 2016 like the Olympics and U.S presidential elections which also bode well for Twitter. Plus, there is tremendous hope that Jack Dorsey, co-founder and second time CEO will pull it all together for Twitter.

BUT, despite Dorsey being at the helm for almost 6 months, there hasn’t been much change in Twitter’s fortunes. Though the plan looks good on paper, execution remains a challenge.

On the other hand, after a few initial hiccups, Facebook is now firing on all cylinders. An ever expanding user base remains Facebook’s primary growth catalyst. Not only that, Facebook’s subsidiaries (Instagram, Oculus, Messenger and WhatsApp) offer tremendous potential and have been referred to as multibillion dollar opportunities for a long time now.

Facebook’s move into the emerging AI & AR/VR market, a bold step in our view, is projected to bear fruit over the long term. The company is keen on expanding AR/VR technology beyond gaming to new industries such as communications, media and entertainment, and education, thus driving future growth. As a result, Wall Street is betting high on the stock.

Revenues and Profitability

Facebook’s revenues grew 43.8% to $17.9 billion whereas operating profit was up 24.7% to $6.22 billion in 2015. Growth in advertising is driven by increasing mobile engagement, higher number of marketers, continuing investment in new products and robust performance of its news feed ads. Facebook has over 2.5 million active advertisers and 50 million active SMBs. Facebook saw a 56.6% rise in expenses with a  corresponding negative impact on its profitability.

In Twitter’s case, we need to give credit to the company for growing revenues despite decelerating user growth. For 2015, the company registered revenue growth of 58.1% to $2.2 billion driven primarily by increasing advertising especially mobile ad revenues. However, a 37.4% rise in expenses for the year wiped out its profits leaving it with an operating loss of $450 million for the year.

Going forward, as the companies scramble to fight for ad dollars, expenses will continue to rise. In these circumstances, if Twitter’s revenue growth doesn’t accelerate, it will continue to report losses.

Cash Position

Facebook sits on a cash pile that is over $18 billion. Moreover, its free cash flow doubled this year to $2.1 billion. On the contrary, Twitter’s cash reserves are paltry at $3.5 billion and the company generated positive free cash flow ($36 million) for the first time in 2015. Facebook’s strong liquidity position gives it an edge over Twitter.

Share Price, Key Metrics and Estimate Revision

Now we come to comparing the share price volatility of the two companies:

Facebook appears to be growing steadily (price moved +7.22% YTD, +20.93% in the last six months, up 9.24% in the last three months and up 6.14% in the past month).

In contrast, Twitter shares have a long road to stability (-20.92% YTD, -38.27% in the last six months, -22.36% in the last three months and down 11.89% in the past month). In fact, Twitter shares are currently perched slightly above $17 which is below its IPO price of $19.

However, Facebook’s shares are more expensive compared with Twitter. Facebook’s price to sales ratio of 18 and price to book ratio of 7.2 are relatively high as against 5.2 and 2.7, respectively for Twitter. 

Over the last 60 days, Facebook’s earnings estimates per share for 2016 and 2017 have been unchanged at $2.40 and $3.34 per share. For Twitter, estimate for loss per share for 2016 and 2017 were narrowed by 16 cents and 12 cents to 39 cents and 17 cents, respectively. 

Bottom Line

We believe the current bullish sentiment surrounding Twitter due to the NFL and MasterCard might be short lived. The NFL streaming rights, though an achievement, aren’t likely to have a huge effect on Twitter as the games will simultaneously be played on NBC, CBS and the NFL Network.

As far as the tie up with MasterCard is concerned, it still remains a probability. On the other hand, the Facebook juggernaut looks unstoppable despite its fair share of challenges. Though both the companies have a growth score of A, it is Facebook that is actually growing and Twitter that has just the prospects.

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FACEBOOK INC-A (FB): Free Stock Analysis Report
 
TWITTER INC (TWTR): Free Stock Analysis Report
 
MASTERCARD INC (MA): Free Stock Analysis Report
 
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