2 Reasons Facebook Will Outperform Twitter in 2014

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following a losing week, stocks were unable to reverse the trend on Monday -- even as the Senate prepares to confirm Janet Yellen as the next chair of the Federal Reserve. The S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) both fell 0.3%.

The stocks of Facebook (NASDAQ: FB  ) and Twitter (NYSE: TWTR  ) both turned in terrific performances in 2013. Facebook managed to shed the stigma of its shambolic 2012 May IPO and investor concerns that the transition to mobile would hurt its advertising franchise, for a doubling in its share price. Twitter, meanwhile, flew out of the gates following its November stock market launch and soared even higher, racking up a 165% return relative to its $26 offering price.

However, there are at least two reasons to believe that today, which saw Facebook's stock gain 5%, while Twitter's was down 4%, will be more representative than last year of the relative performance of the two stocks over the course of 2013. Those reasons? Appeal and valuation (but mainly valuation).

First things first: Why the divergence between the two stocks' performance today? Credit Morgan Stanley's Scott Devitt, who downgraded Twitter to underweight -- analyst-speak for "sell" -- while raising his price target for Facebook (Devitt maintained his overweight, or buy, rating on Facebook). A week ago, I pointed out that more analyst downgrades of Twitter were likely, and I don't expect Devitt's to be the last.

In justifying the Twitter downgrade, Devitt wrote that "as competition for online ad dollars intensifies, we guide investors to Google  (NASDAQ: GOOGL  ) and Facebook, dominant platforms with more attractive risk/reward." When it comes to advertising, reach matters and there is no denying that Google and Facebook are dominant in the areas of online search and social networking. According to its IPO prospectus filed on Nov. 4, Twitter has 230 million active users, compared with 1.2 billion for Facebook as of Sept. 30 (874 million for Facebook mobile products alone).

When Devitt refers to a "more attractive risk/reward," he is alluding to the gap in the valuation placed on Twitter and the two dominant platforms -- to Twitter's disadvantage. Indeed, Google is now valued at an enterprise value equal to 4.9 times the next 12 months' revenue estimate against 14.2 times for Facebook. The equivalent multiple for Twitter? An egregious 36.7.

In theory, it would be possible to justify such an oceanic gap if Twitter had growth prospects that were commensurate with the success of Google and Facebook; after all, Google's enterprise value was valued at 44 times trailing-12-month revenues as recently in March 2006.

However, one ought to be justifiably skeptical that Twitter will achieve the same widespread adoption. As Devitt points out in today's note, "despite the ease at which users can sign up for Twitter, we think it is inherently more complicated to understand how to get the most out of Twitter compared to Facebook's service, which is easier to use." Journalists get it -- they have to, as it has become a working tool for many of them -- so Twitter receives enormous media exposure, but it doesn't seem to me to have the same mainstream appeal as Facebook.

Whether a mechanical result of a low trading float or the product of investor euphoria, or some combination of both, Twitter shares finished 2013 massively overvalued. I don't see the business fundamentals catching up with the valuation this year -- expect Twitter shares to struggle. Facebook, though far from cheap, is for investors looking for exposure to social networking.

The time to act is now: Here's the one stock you must own for 2014
There's a huge difference between a good stock, and a stock that can make you rich. 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.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2014, at 11:13 PM, alexander774 wrote:

    Facebook is going to be the best stock of 2014, and will be no suprise as the stock rises over $140 in the next 6 months.

    Now Twitter is not a bad stock but it is way too overvalued. The stock will crash in the upcoming months back to $45.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2785238, ~/Articles/ArticleHandler.aspx, 8/28/2015 5:53:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 8 hours ago Sponsored by:
DOW 16,654.77 369.26 2.27%
S&P 500 1,987.66 47.15 2.43%
NASD 4,812.71 115.17 2.45%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/27/2015 4:35 PM
^DJI $16654.77 Up +369.26 +2.27%
FB $89.73 Up +2.54 +2.91%
Facebook CAPS Rating: ***
GOOGL $667.96 Up +8.22 +1.25%
Google (A shares) CAPS Rating: ****
TWTR $26.46 Up +1.43 +5.71%
Twitter CAPS Rating: ***