How Twitter Stock Beat Facebook in 2013

Shares of microblogging maestro Twitter (NYSE: TWTR  ) was without question one of this year's most talked-about tech stocks.

As the hottest tech IPO this side of Facebook (NASDAQ: FB  ) , Twitter was so talked about in the run up to its public debut that it was practically inescapable. And as the two best-known social networking companies trading on the public markets, Facebook and Twitter will always be compared to one another, like it or not.

Source: Twitter.

Looking back at how Twitter's and Facebook's shares performed in 2013, Twitter absolutely trounced Facebook, despite a strong performance on its part as well.

Let's take a look at why.

Twitter vs. Facebook -- 2013 edition
Thankfully for the investors, both Facebook and Twitter absolutely eviscerated the broad market's returns over the course of 2013.

As we head into the end of the year, the S&P 500 and Nasdaq have increased 29% and 37.5%, respectively, in 2013, notching one of the most impressive annual performances for these broad market indexes in recent memory.

However this still pales in comparison to Facebook. Over the past year, Facebook has surged just over 100%,  which is good for the fifth best performance among Nasdaq 100 companies.

But even Facebook's epic performance can't hold a candle to Twitter's epic run since it's pubic market debut. Most charting tools track Twitter's performance since its first public trade, which is good for a 34% return since November. However, tracking Twitter from its actual IPO price of $26, Twitter's shares have gained 130% in 2013, even despite falling from a recent high of nearly $75. 

So what drove both of these performances?

The bulls come out for Twitter and Facebook
One of key the drivers that sent both Facebook and Twitter's shares skyward was their breakneck growth rates. Over the past three quarters, both Twitter and Facebook have expanded their businesses and financial results impressively.

Revenue Growth (Y-O-Y) For:

Q1 '13

Q2 '13

Q3 '13

Facebook 

37.8%

53.1%

59.7%

Twitter 

110.5%

104.7%

104.8%

Source: S&P Capital IQ.

Although Facebook's sales growth has accelerated in each of its two past quarters, it still remains well below Twitter's consistent triple-digit sales growth. This should make plenty of sense, though, because Twitter is also smaller and younger than Facebook in nearly every sense (users, total sales, etc.). Regardless, most companies would happily trade either Twitter of Facebook for their growth rates,

However, their impressive growth rates only partially explain Facebook's and Twitter's jaw-dropping performances in 2013.

The other driver for Twitter's and Facebook's rallies this year as been a healthy dose of increased optimism. Twitter has yet to turn a profit over the course of 12 months, so the best multiple to compare the two still remains sales. And as I alluded to, investors have shown an increasing appetite for paying up for Twitter and Facebook's future sales. Their respective multiple expansion has been insane.

Price-to-Sales Ratios For:

Beginning*

Current

Facebook 

12

19

Twitter

26 

64 

Sources: S&P Capital IQ and author's calculations.

Put in this light, you can see that the premiums for both companies absolutely soared in addition to their earnings growth in 2013. The two preceding factors formed the perfect storm for both firms' massive rallies in 2013. However they do also present a much more challenging case for anyone looking at them as potential buys in 2014.

How expensive is too expensive?
This is, of course, the classic growth investor's dilemma.

The tech space is by no means foreign to what could be loosely described as "optimistic" valuations; even Facebook and especially Twitter look pricey. Facebook currently trades north of 50 times next year's earnings per share. Twitter isn't expected to become fully profitably on an annual basis until 2015.

So looking to next year, I'd be surprised if we the same kind of performances from both Twitter and Facebook as we witnessed in 2014. As leaders in the emerging space for social media advertising, their huge potential certainly goes without question.

However, given the truly wild prices you'll have to pay for a piece for their rosy futures, especially with Twitter, investors might be better served looking elsewhere today.

A better bet than Facebook and Twitter for the year ahead 
The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


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