- Facebook's ecosystem gives it staying power.
- Facebook is expanding into other markets such as mobile payments.
- Twitter's valuation is not justified given Facebook's.
The latest quarters from Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB) diverged with Twitter's results underwhelming investors and Facebook's results exciting them. Twitter beat Wall Street's estimates on both revenue and earnings but with such a high valuation, investors and traders are looking for extraordinary results, not just beats or as expected results. The latest quarter's results are not the only difference between the two companies, however. Twitter's valuation on a relative basis dwarfs that of Facebook and is a factor in why Twitter's stock dropped over 10 percent after its results were released. Twitter has to produce magnificent results in the future if it wants to grow into its current valuation.
The Latest Quarter's Results
TWTR's revenue increased 119% in 2014's first quarter to $250 million compared to 2013's, but the company failed to generate a profit based on GAAP. Its net loss was $132 million on a GAAP basis while its non-GAAP earnings, which Wall Street follows, were $0.183 million or nil on a per share basis. Its GAAP EPS was a loss of $0.23. TWTR's internal operational metrics were positive as the company's average monthly active users (MAUs) increased 25% from the prior year's quarter to 255 million. Its MAUs on mobile increased 31% year-over-year to 198 million. TWTR's mobile users now account for 78% of its total MAUs.
FB turned in a great quarter with its revenue increasing 72% to $2.5 billion in the 2014 first quarter versus the prior year's quarter. Unlike TWTR, FB did turn a profit of $642 million on a GAAP basis, representing a 193% increase from the prior year. Its non-GAAP earnings were $885 million, an increase of 184% year-over-year. The corresponding EPS numbers were $0.25 for GAAP and $0.34 for non-GAAP. FB's internal operational metrics were good like TWTR's. Its MAUs rose 15% to 1.28 billion from the previous year's quarter and its mobile MAUs were 1.01 billion, an increase of 34%. Its mobile MAUs account for 79% of its total MAUs.
Social Media Valuations Are Not Cut From The Same Cloth
Facebook and Twitter are both highly valued relative to the market, but Twitter is valued even more than Facebook based on several valuation metrics. Here is a chart showing the companies' disparate valuations:
Source: Yahoo Finance and Morningstar
It is clear that you are rolling the dice if you invest in TWTR based on the aforementioned valuation multiples. You can really only justify an investment in TWTR if you believe that its future will be resoundingly different and pick up steam to give support to its price. TWTR has no earnings on a full year basis looking back and a forward P/E over five times that of FB's. But is TWTR really going to grow five times more than FB next year? The discrepancy widens even more when you consider the cash flow of the companies compared to their prices. TWTR trades at a whopping 5,000 times its current cash flow while FB trades at a relatively minuscule 31. The other differences aren't as astonishing. The P/B values of the companies are about in line, but investors must pay double the multiple for TWTR's sales compared to FB's. Based on that, are TWTR's sales twice as valuable as FB's? If the justification is the resulting earnings, then the answer is no.
FB has more of an ecosystem and is dually adding assets while taking out competition. Its acquisitions of Instagram and WhatsApp are just two examples. Its ecosystem has allowed other companies like Zynga (NASDAQ:ZNGA) with FarmVille to develop games on its platform. The company is also refining and attempting to grow its mobile payments platform, which generated $900 million in transaction fees last year. Moreover, the information Facebook's users put on the platform is extremely actionable and leads to Facebook's advertisers pitching their products to the correct audiences. Its payments platform could be utilized further for targeted ecommerce. TWTR may have plans for the future but it has to realize them on an increasingly quicker basis if it wants to stay in the game, let alone one step ahead of it. Nonetheless, TWTR's valuation today is suspect given that FB is exceeding estimates at a high clip and is already a profitable company.