When you look at the performance of top social media stocks so far in 2018, there's an interesting trend emerging.
Last year's laggard, Twitter (NASDAQ:TWTR), has rebounded and is now delivering hefty gains.
At the same time, 2017's top performer, Facebook (NASDAQ:FB), has done virtually nothing for investors.
It it time to reconsider positions on either or both stocks?
Facebook shares are up just 2% on the year, hurt by uncertainty about future growth. Investors are concerned about the company's recent News Feed changes and whether this will impact user engagement time and ad revenue.
The biggest question for investors: will this social media giant continue to generate revenue at as impressive a rate as has been the case during the past three years? In 2017, Facebook reported an industry-beating profit of $15.9 billion on sales of $40.65 billion.
Facebook’s impressive valuation metrics, however, continue to support the stock, which has held up well despite a lot of recent headwinds. Facebook shares, for example, have the lowest earnings-based valuation among the FAANG group; the company has no debt and has the best operating and profit margins of the group.
Still, it the current wave of negative news about Facebook hasn’t fully run its course yet. The company has been encountering growing scrutiny by regulators and politicians on some of its loopholes—and lack of transparency—which allegedly allowed U.S. adversaries to exploit Facebook user information in order to manipulate the U.S. presidential elections.
In a latest development, Facebook announced it has suspended Cambridge Analytica, a London-based company that worked for Donald Trump’s 2016 presidential campaign, after accusing it of receiving personal data from social media accounts without permission. Some newspaper reports say the data breach involved information from more than 50 million Facebook profiles, prompting Massachusetts Attorney General Maura Healey's office to open an investigation into the affair.
These challenges sum up why Facebook’s stock has underperformed this year. The price has been flirting with a break below its 50-day moving average; should it fail to hold above this support level, a dip down to the 200-day moving average can’t be ruled out, according to some analysts.
Twitter, on the other hand, has produced a remarkable rally in 2018, rising 45% this year, adding to the 135% boost it delivered over the past full year. These massive gains indicate that Wall Street has found new love for this once doomed Facebook competitor.
Encouraged by the changes to Twitter’s user interface, renewed takeover speculation and a recent quarterly profit, investors are hoping that Twitter can still make money through its niche—as a forum for celebrity- and politics-focused discussions.
To more accurately judge the two stocks, first consider how Twitter was able to arrive at its first-quarterly profit after incurring about $2.2 billion in cumulative losses from 2013 to 2016.
After a drastic cost-cutting drive over the past year, Twitter managed to report its first quarterly GAAP (generally accepted accounting principles) profit in the fourth quarter. The company reported net income of $91.1 million on $731.6 million of revenue, or $0.12 per share, a positive move from a loss of $167.1 million in the prior-year period. Indeed, Twitter expects 2018 to be its first full year of GAAP profitability.
While Twitter managed to grow revenue by 2% in the fourth quarter, this massive bottom-line swing was primarily brought about via its cost-cutting drive. The company slashed total costs by 28%, driven by a 34% reduction in research and development spending, a 29% cut in cost of revenue and a 27% decline in sales and marketing.
My biggest concern is whether this swing has legs given the company’s meager revenue and ongoing questions about user growth, when the income statement turnaround has been achieved almost entirely through cost-cutting?
Which Stock Is a Better Buy?
There's no doubt that Twitter stock has momentum—it's been very strong so far in 2018. Facebook, however, is struggling to gain traction as its platform experiences some of the biggest headwinds ever seen in the history of the company—so significant that a major transformation to the business model could be warranted.
But if you’re a long-term investor, I don’t think there is a case for one or the other. Twitter is nowhere near to delivering what Facebook has achieved since its IPO in 2012. Its monthly active users (MAUs) stand at 2.1 billion vs. 330 million for Twitter. FB stock has delivered five-fold gains since its IPO, while Twitter stock has added about 35% from its IPO price of $26 per share in 2013.
As I see it, Facebook shares are still a safe long-term bet despite the current, ongoing difficulties. I think Facebook stock will resume its upward journey once the political uncertainty in the U.S. is over and Mark Zuckerberg shows investors that his revenue-generating machine is still intact. He'll do this by producing strong earnings growth in the next couple of quarters.
I won't be buying shares of Twitter anytime soon despite the company's switch from red to black. I think Twitter still has a lot of work to do to grow its revenue at a pace that’s good enough to justify its current rich valuation.