It may seem like an obvious answer to ask the question of which is best, Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD) or Twitter (NYSE:TWTR)? If we are talking about which company now, the answer is obvious in Facebook. If deciding which is the best investment moving forward, charts like the one below among other factors must be considered.
FB PS Ratio (TTM) data by YCharts
When 2014 started, FB, LNKD and TWTR all traded at almost the exact same price/sales ratio. This is because investors did not know which would reign superior or have the brightest future moving forward. Since then, the answer to that once lingering question could not be more clear, and it is illustrated in the above chart.
Fact is that Facebook continues to defy gravity with accelerated revenue growth as it becomes a larger company. Its ad revenue grew 57% during its last quarter, an increase from 45% growth in the third quarter and 43% in the second quarter. This differs from the performance of Twitter and LinkedIn, whose growth has decelerated and whose respective outlook has grown dimmer by the quarter.
Also impressive for Facebook is the fact that its monthly active users rose 14% to 1.59 billion and 21% growth in mobile users. Other platforms like WhatsApp and Instagram also are experiencing very impressive growth, seeing users top 400 million and one billion, respectively, with the latter seeing ad revenue growth of 66%.
The point in identifying these strengths is to illustrate why FB stock multiples have remained so high, whereas its competitors have seen rapid multiple declines. Facebook had fourth quarter revenue of $5.84 billion and it does not appear to be reaching a peak or slowing down any time soon.
But while FB is clearly the superior company, it's also the most expensive, with a market capitalization of $300 billion that trumps IBM (NYSE:IBM) and Oracle (NYSE:ORCL) market capitalizations combined. Therefore, how much peak upside could really exist for FB stock over the next five years, maybe 30%? That would make Facebook a $400 billion company, something that is tough to imagine.
With that said, LinkedIn's problems are unquestionably difficult to solve. Sure, its registered users rose 4.5% quarter-over-quarter to 418 million, but the problem is converting those registered users in monthly and weekly active users. LinkedIn reported that its unique visiting members for the quarter stood at just 100 million total and 57 million on mobile. In other words, the overwhelming majority of users are only active when seeking new job opportunities or growing their network of connections for future opportunities. It's not a top destination for day-to-day social engagement, and that's why advertisers are pulling away from LinkedIn.
One big reason that LNKD stock crashed 43.5% on Friday is because Marketing Solutions revenue rose only 20%, with display ad sales falling more than 30% versus last year. The majority of LinkedIn's revenue and growth comes from Talent Solutions, which increased 45% year-over-year with more than $530 million in revenue. These are corporate accounts that use LinkedIn for hiring and HR-related purposes, but with 42,000 corporate solution accounts, the big question is how much long-term growth exists in this segment? Based on LNKD's stock reaction to earnings and its guidance, my guess is not enough to support a $23 billion company long term.
All things considered, LinkedIn and Twitter are niche service providers, not for everyone, lacking the mass appeal that has made FB stock so promising. Yet, because of Facebook's valuation, it's hard to identify too much upside over the next five years, and the same applies to LNKD stock. So while Twitter is clearly inferior to Facebook, it might actually be the best investment.
Granted, Twitter is yet to release fourth quarter earnings, so it's hard to determine whether Twitter will face the same problems that pushed LNKD lower on Friday. The biggest problem is that advertisers and consumers are spending more time on Facebook, with Facebook dominating smartphone use with four of the top 10 apps on both Android and the App Store.
Still, TWTR stock now trades at just 3.5 times this year's expected revenue, and while expectations have been lowered significantly, Twitter is still expected to grow almost 40% this year. That's actually faster growth than Facebook's 32.5% expected growth.
Furthermore, I believe that expectations surrounding Twitter are far too conservative. Keep in mind that EPS expectations for Twitter's FY2016 have been lowered from $0.59 to $0.55 over the last three months. However, with Twitter recently cutting 7% of its workforce, it would seem that the company's EPS expectations would rise, not fall.
Also, 40% expected revenue growth in 2016 is impressive, but that's still 500 basis points slower growth than analysts expected four months ago. Those revisions lower have caused TWTR stock to fall 43% over the last six months. This stock loss coupled with lower costs and Twitter's recent plans to monetize its 500 million logged off users, who see tweets without a Twitter account, suggest that it can beat low expectations, thereby making an oversold TWTR stock a good buying opportunity.
The bottom line is that Facebook may be worth the $300 billion market capitalization that investors are willing to pay for it, but not much more, if any. Facebook will continue to grow and will demand higher ad prices as it pushes forward with video advertising and monetizing Instagram, WhatsApp and Messenger Platform. However, investors can't ignore the enormous revenue/profit disconnect that exists between Facebook and other large tech companies that are less valuable.
|2015 Revenue||2015 Operating Income|
|$18 billion||$6.2 billion|
|IBM||$81.7 billion||$16 billion|
As you can see, IBM has almost as much operating income as Facebook does revenue. Yet, FB is 150% more valuable than IBM. Hence, ultra high expectations are baked into Facebook's valuation, meaning the chances of it achieving a $400 billion valuation, or upside of 30%, by successfully monetizing video, WhatsApp, Messenger or Instagram are not a guarantee. Instead, those things are expected, with there being far more downside risk if Facebook fails vs. the upside potential if Facebook keeps clicking on all cylinders.
Meanwhile, Twitter does not have the promising prospects of Facebook baked into its stock. However, its valuation and oversold stock, combined with very impressive growth, make it very appealing. This is especially true given the reduced costs from job cuts and potential in monetizing those logged off users, two catalysts that have seemingly been overlooked by TWTR investors. In other words, Facebook needs everything to go right for it to add moderate stock value, LinkedIn has very little that can go right, and Twitter just needs a little to go right in order to satisfy conservative expectations. Considering these scenarios, TWTR stock is the best bet of the three companies.
Disclosure: I am/we are long TWTR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.