- LinkedIn and Twitter shares have both fallen by close to 60% in the last one year.
- Both LinkedIn and Twitter trade at similar Price to Sales (P/S) multiples.
- LinkedIn is still a safer bet for those who want to own one of the two stocks.
It's a good time to go bargain hunting in the social/professional networking space. While neither LinkedIn (NYSE:LNKD) nor Twitter (NYSE:TWTR) are attractive enough to appease the staunch value investor, both stocks have fallen significantly from their highs in the last twelve months. Both stocks now trade at similar Price to Sales (P/S) multiples and both companies have had some trouble bringing in incremental active users. However, LinkedIn is a safer bet for those who are looking for some exposure to one of these two stocks in the social networking space.
Quickly, before we proceed, the reason we're not looking at Facebook in this post is because it's very different from these two companies. It's growing fast, making solid profits and is way bigger in terms of its user base. Also, Facebook has had a fairly good run in the last one year, gaining by over 30% and currently trades at about 3 times the multiple (P/S) that LinkedIn and Twitter trade at. That's sort of compensated for by way bigger profits. Facebook is a solid company that's probably well suited for aggressive growth investors. Twitter and LinkedIn though are very different animals.
Twitter vs LinkedIn - Stock Performance & Valuations
Twitter and LinkedIn have had a brief period of contrasting fortunes since they both reported their latest set of earnings numbers. Twitter reported its Q4 results on 10 Feb and the stock is up by about 24% since. In contrast, LinkedIn, which reported its Q4 results on 4 Feb, has lost 38% of its market cap as on 2 March 2016. While LinkedIn managed to outperform Twitter for most part of the last twelve months, both stocks are now down by about 60% for the period. Both stocks had a lot of growth priced into their valuations and meeting those expectations has been an uphill task for both companies.
After the year long thrashing, Twitter and LinkedIn now trade at very similar Price to Sales (P/S) multiples. LinkedIn's P/S multiple of 5.2 is marginally cheaper than Twitter's 5.7. A Price to Earnings (P/E) comparison doesn't make too much sense because neither makes any GAAP profits. So, which one's more attractive? Let's dig a little deeper.
Twitter vs LinkedIn - User Growth
Both Twitter and LinkedIn have found a challenge in active user addition. In Q4, Twitter saw its Monthly Active Users (MAUs) drop to 305 million from 307 million a quarter ago. During the same period, LinkedIn managed to hold onto its 100 million Unique Visiting Members. Both companies have failed to make significant additions to their active user bases in the last four quarters. However, LinkedIn is evidently able to monetize its active user base better to generate more Dollars per active user.
While LinkedIn's overall member base (414 million) is still growing, we're not looking at that too much here because then you'd have to compare that with Twitter's overall user base of logged in and logged out users put together. Twitter's logged out user base is reportedly about 500 million, but we have no other data like growth rates, etc, to assess that base. So, we'll stick with active users or members.
Twitter vs LinkedIn - Revenue Growth & Profitability
In terms of revenue growth, Twitter has done a better job. Not just in terms of growth rate, but also in terms of absolute Dollar addition to the top line. Twitter's 2015 revenue grew by 58% Year-on-Year (YoY), compared to a 35% YoY jump for LinkedIn.
While Twitter appears to be growing way faster than LinkedIn, it's important to note that the former also has a smaller revenue base. In absolute Dollar terms, Twitter added $815 million in incremental revenue (over 2014) in 2015, a little better than LinkedIn's addition of $772 million. The gap though isn't as wide as their growth rates suggest.
When it comes to profitability, LinkedIn does a much better job than Twitter. The professional networking site lost $165 million in 2015, representing a loss of 6% compared to Twitter's loss of $521 million or 23%. Twitter managed to pare its losses significantly in 2015, bringing loss margins down from 41% in 2014 to 23% for the year. However, going by CFO Anthony Noto's commentary in Twitter's Q4 earnings call, the management doesn't expect to see as much improvement in 2016:
"In 2016, we will have margin expansion based on the midpoint of our range. It's not as much as we had in 2015, and that's because we see a significant number of growth opportunities in front of us."
So, you'd expect LinkedIn to stay ahead in terms of profitability at least for a year. Even in terms of cash flows, LinkedIn inspires more confidence, covering 26% of its full year expense with operating cash flows, compared to Twitter's 14%. Clearly, LinkedIn is stronger financially though marginally slower in terms of revenue growth.
Summing It Up
Both Twitter and LinkedIn have lost significant chunks of their value over the last twelve months and now trade at similar valuations. Both companies have seen their active user bases platue. While Twitter is growing marginally faster than LinkedIn, the latter comes with better profitability and operating cash flows. While neither is a fundamentally excellent stock, LinkedIn is a safer bet for investors looking to invest in one of these two beaten down stocks in the social/professional networking space.