Why Twitter Stock Will Not Go The Facebook Way!

  • Twitter's User Growth raises concerns over long term growth.
  • Twitter's Monetization is holding up revenue, but still lags Facebook.
  • Twitter and Facebook are both expensive, but Facebook is better of the two.

Why Twitter Stock Wont Go The Facebook Way

Often, investors compare the post-IPO price movements of Twitter  (NYSE:TWTR) and Facebook (NASDAQ:FB), arguing that the current drop in Twitter’s stock price is momentary, as was the case with Facebook, and that the stock will resume its upward journey very soon. We compare the user growth and monetization abilities of the two companies to see if that could be a possibility. Barring an extra-ordinary performance by twitter, it seems unlikely. We continue to see risks attached to Twitter’s long term growth, as the contrast between the two companies becomes more evident.

Twitter vs Facebook: User Growth

Twitter’s first earnings release post listing exposed its below par user growth, raising concerns about the scalability of the microblogging platform. Twitter’s next earnings release for Q1 2014 hasn't done enough to ward of those concerns.

Twitter has 255 million MAUs (Monthly Active Users), and Facebook has 1.28 billion MAUs, at the end of Q1 2014. It’s quite a contrast to start off with, but it comes in handy while highlighting the difference between the two social networking platforms.

Twitter vs Facebook User addition per quarter

Given that Facebook has a much larger user base to start off with, the fact that it still adds more active users every quarter calls for some appreciation.

What’s really worrying about Twitter though, is that user addition has shown a declining trend since 2013. The metric does indicate a rebound in Q1 2014, however, a Q1 jump has typically been the case with Twitter. It remains to be seen whether this is actually a turn-around or if Twitter’s metrics are just going about their normal routine.

Facebook’s user addition on the other hand, has largely been stronger and more consistent.

To highlight our concern, let’s shift from the absolute number of users added, to the sequential growth in users (in % terms) for the two platforms.

Twitter vs Facebook User Growth Percentage

Notice how Twitter’s line starts off way higher than Facebook’s? That’s how it’s supposed to look, given that Facebook has a user base that’s about 5 times that of Twitter. But the serious concern is that Twitter’s user growth rate is approaching that of Facebook’s, and that for us, is a red flag.

Twitter has been revamping its user experience with a new look profile and more rich content, more pictures, videos, etc. How much of an impact this will have on its user growth, is something only time will tell.

For now, the key take-away: Facebook wins, but more importantly, Twitter seems poised to lose more than just this contest, with user growth slowing, both in percentage and absolute terms.

What’s worse for Twitter, is that user engagement hasn’t been compensating for the lacklustre user growth. Since we do not have official user engagement metrics for Facebook, this isn’t really a part of the comparison. But we thought it would serve as a useful bit of additional information.

Twitter User Engagement Metrics

User growth is a basic necessity that can’t be done away with, not at Twitter’s user base at least. Strong user engagement can make up for slack user growth to some extent. However, it’s evident how user engagement has been going downhill barring the spikes in Q1 every year.

To answer the question about how Twitter has been managing to record such stellar revenue growth, let’s shift to the next section, ‘User Monetization’.

Twitter vs Facebook: User Monetization

Twitter vs Facebook Revenue Per Mau or Monetization

Here’s where Twitter needs to commended, for its user monetization. Twitter’s monetization rate is less than half of Facebook’s, but Twitter’s outstanding revenue growth has been fuelled by its monetization rate in the absence of strong user growth and engagement.

However, getting back to the comparison, apart from having a lower monetization rate, Twitter, also lags behind Facebook in terms of absolute increase in monetization rate or revenue per MAU.

Twitter vs Facebook Increase in Revenue per Mau per quarter

Key Take-away: Again, Facebook wins. Here Twitter does better than in the earlier section, but monetization can’t compensate for user growth beyond a certain extent. Eventually, if Twitter wants to sustain its largely advertising dependent revenue growth, user growth becomes imperative, and so does user engagement.

Poor user engagement will drag the rate Twitter gets to demand from advertisers even if user growth improves.

If Twitter manages to show improvement in user growth and engagement, the future could be bright. However, going by the way things stand currently, Twitter’s long term growth is at risk. If Q2 2014 proves that Q1 was a one off improvement in these metrics, Twitter’s stock price movement won’t look pretty. After the recent 20% free fall in stock price, Twitter, has a lot at stake in Q2 2014.

Twitter vs Facebook: Valuation



Last 4 quarters average Y/Y Growth



Price/Sales (P/S)



Price/Earnings (P/E)



Of the two, Twitter is definitely growing at a much faster pace, albeit on a revenue base that’s less than 10% of Facebook’s. Assuming that Twitter had Facebook’s net profit margin of (last 4 quarters average) 14.4%, it would be trading at a P/E of 168. Twitter would still be much more expensive than Facebook and in this scenario the differentiator would be growth.

However, the company has no profits to speak of, putting the onus entirely on growth.

Going by the metrics we’ve discussed and Twitter’s FY 2014 revenue growth guidance of 80-88%, which is a fair bit lower than its current growth rate, paying more for Twitter’s growth doesn’t come across as such a good idea. One must also note that in its latest quarter, Facebook did record a Y/Y growth of 71.6%, which is not all that bad vs Twitter’s guidance.

At this point, we would like to clarify that we think Facebook itself is overvalued, and doesn't make it to our list of favorite stocks. However, it’s clear that Twitter is overvalued, and will have to do more to give Facebook some serious competition.

Compare Twitter stock analysis with Facebook stock analysis.

To see Twitter’s latest stock price movement, click here (NYSE:TWTR)

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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