Last week was a turbulent week for social media stocks. Both Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD) announced their results for the fourth quarter of 2013. Both stocks plunged during the trading session following the announcement. On the other hand, Facebook (NASDAQ:FB) reached an all-time high last week. In one of my previous articles, I argued why LinkedIn is my favorite social media stock (see this article). However, Facebook starts to get interesting as well. This article argues that Facebook's (future) profitability is the reason why the company outperformed Twitter and LinkedIn last week (see graph below).
Twitter's earnings report
Twitter announced their fourth quarter earnings on Wednesday. The announcement was their first earnings report as a public company. Twitter reported fourth quarter revenue of $243 million, up 116% year-over-year. The revenue growth was supported by the growth of Monthly Active Users (MAUs). Twitter's MAUs amounted 241 million, an increase of 30% year-over-year. The average revenue per user rose 66% to $1.01 per user.
Although the reported revenue in the fourth quarter was better than Wall Street's expectations, Twitter's shares fell more than 24% on Thursday (see graph below). Investors are worried about Twitter's ability to grow earnings and profit in the future. For example, Twitter expects lower revenue in the first quarter of this year compared with the fourth quarter of last year. This will be the first quarter-over-quarter revenue decrease in Twitter's history.
LinkedIn's earnings report
LinkedIn announced their fourth quarter earnings on Thursday. The results were mixed. The revenue for the fourth quarter was $447.2 million, an increase of 47% compared to $303.6 million in the fourth quarter of 2012. However, LinkedIn's diluted earnings per share were $0.03, a decrease of 70% compared to $0.10 in the fourth quarter of 2012. Further, LinkedIn reported 277 million users by the end of the fourth quarter of 2013.
The decrease of diluted earnings per share was caused by a 57% increase in sales and marketing expenses. For example, the expenses for share-based compensation grew exponentially from $27.5 million to $57.2 million in the fourth quarter. The higher than expected expenses and lower than expected earnings per share were an unpleasant surprise for investors. Therefore, the stock traded more than 6% lower on Friday.
Facebook's earnings report
Facebook announced their fourth quarter earnings on January 29, 2014. The company was able to generate $2.6 billion in revenue, mostly by selling advertisements. Especially Facebook's performance in the mobile segment was very good. Mobile revenue amounted 55% of Facebook's total revenue in last year's fourth quarter compared to 23% in the fourth quarter of 2012. Further, Facebook reported 1.23 billion MAUs by the end of the fourth quarter.
Facebook earned $1.5 billion in 2013. This equals diluted earnings per share of $0.60 (under US-GAAP), still more than 100 times its current share price. Overall, investors were pleased with the results. The stock climbed 14% after the announcement. Facebook proved that it is still able to grow revenue and profitability at the same time, while Twitter and LinkedIn are struggling to convert revenue into profits.
Revenue per user
Social media stocks are often compared by their revenue per user. This variable is important, because it represents the commercial value of their users. All three companies provides data regarding the amount of active users by the end of 2013. Therefore, I compared the revenue per user (see table below).
|Q4 Rev.||$243 million||$2.6 billion||$447 million|
|Users||241 million||1.23 billion||277 million|
Facebook earned $2.11 per user and LinkedIn earning $1.97 per user. Twitter only earned $1.01 per user. It is clear that Facebook and LinkedIn are able to generate much more revenue per user than Twitter. This implies that Twitter's user base has currently less commercial value compared to Facebook's and LinkedIn's user base.
Profitability is sometimes overlooked when it comes to comparing social media stocks. In my opinion, (potential) profitability is still an important indicator for any investments decision. Profits can be reinvested in the business and/or support dividend payments in the future. Based on the fourth quarter earnings, Facebook seems to be the most profitable social media company.
To support my statement that Facebook is the most profitable company, I compared the profitability of the three companies in the table below. It is obvious that Facebook is in fact the most profitable social media company right know. Facebook's trailing P/E ratio (50.85 times this year's EPS) and forward P/E ratio (37.84 times next year's EPS) are well below the ratio's of Twitter and LinkedIn.
|Est. EPS '14||$0.01||$1.25||$1.65|
|Trailing P/E ratio||n/a||50.85x||125.7x|
|Est. EPS '15||$0.21||$1.68||$2.53|
|Forward P/E ratio||251.7x||37.84x||81.95x|
Source: Yahoo! Finance
Facebook showed investors that it is able to turn revenue into profits. On the other hand, Twitter and LinkedIn are still struggling to increase their profitability. This is probably the reason behind Facebook's outperformance last week. It is likely that Facebook will outperform Twitter and LinkedIn when both companies are unable to grow their profitability at a faster pace.
Finally, I have to make some reservations. Twitter and LinkedIn are still growing revenue and profits, based on the analyst estimates. Further, Facebook's growth curve could slow and/or the growth curve of Twitter and LinkedIn could fire up in the next few years. In the data presented in this article, I did not make an assumptions for the potential change in the growth curve beyond 2015.
Despite the reservations, I believe that Facebook has the most potential in terms of profitability. The company earns more revenue per user than the peer firms Twitter and LinkedIn. Further, Facebook's user base and total revenue is much higher compared to Twitter and LinkedIn. This provides Facebook with substantial scale benefits over its peers.