Twitter (NYSE:TWTR) had a remarkable run last year. In the face of extreme negativity about social media stocks, the company outperformed its main rival Facebook (NASDAQ:FB), gaining 20% as Facebook plunged 26%.
But that period of outperformance is losing its steam. After last year's rally, Twitter stock has climbed 8% in 2019 while Facebook has powered ahead and jumped in excess of 20%. This divergence is a sign that the Twitter bulls' resolve is weakening and investors are probably seeing more value in the company’s much bigger rival.
Despite Twitter’s slow move higher, we think Twitter is better positioned to withstand the selling pressure that comes after every negative event. Last week, for example, when Facebook stock bore the major brunt of the selling pressure following the live streaming of a massacre in New Zealand, dropping 2.5% on Friday, Twitter shares hardly moved, finishing the week up 0.6% at $31.22. The stock fell 0.5% to $31.08 yesterday vs Facebook's loss of an additional 3.3%.
In our view, Twitter is playing smartly in this environment where regulators, politicians and the general public are scrutinizing social media companies after a series of data breaches and political manipulation of these platforms. The company has provided investors with transparency by adopting an open approach to problems within its network. CEO Jack Dorsey has been warning investors since last summer that his platform won’t see user growth as the company undertakes a massive cleanup operation, removing fake accounts and putting an end to hate speech.
Twitter’s Aggressive Purge Paying Off
The results of this aggressive purge were visible in the company’s fourth-quarter earnings report, when its ad revenues rose 23% year over year to $791.4 million. The company was also able to show that with the smaller base of its daily-active users, it can still build a sustainable business which investors can trust in this highly dynamic environment for social media companies.
Twitter’s full-year operating income in 2018 rose to $453.3 million compared with just $38.7 million the year before, helped by more ad engagements that rose 33% in the last quarter quarter. In the past summer, the company informed investors that it had identified almost 10 million dubious accounts a week and is putting all accounts through a security check.
What investors didn’t like though was Twitter warning that this cleanup will continue to put pressure on spending which is likely to go up by 20% in 2019.
For Facebook, on the other hand, the last week was probably one of the most difficult. The world’s largest social network faced the longest-ever outage of its network and services. It also faced the beginning of a criminal investigation into its data agreements with other companies, and saw two key executives leave. And if all that wasn’t enough to shake investor confidence, the massacre of 50 people in New Zealand streamed live on Facebook led to almost universal condemnation and outrage.
Bottom Line
It's becoming more difficult to pick winners and losers in the social media investing universe, given the nature of challenges these companies are facing. Social media platforms are in a constant state of firefighting, while their shares remain highly vulnerable to negative events.
What separates Twitter from its peers in this environment is its aggressive strategy to clean up its network and adopt a more transparent way of dealing with challenges. This approach may not show higher user growth in the short-run, but the initiative and effort to get it right will put the company on a more solid footing in the long-run.