What User Engagement Tells Us About the Big 3 Social Media Companies?

Twitter, LinkedIn, and Facebook are considered the big three of social media, but one reigns superior in the most important metrics for achieving longevity.

Apr 1, 2014 at 1:00PM

Shares of Twitter (NYSE:TWTR) have fallen a rather predictable 25% this year, although it continues to trade at a rather generous 39 times sales valuation. Lately, debates surrounding user growth, timeline views, and overall engagement have created a stir. And as we look closer into these concerns, it is possible that unlike Facebook (NASDAQ:FB), Twitter and peer LinkedIn (NYSE:LNKD) may not stand the test of time, or are unlikely to ever support the valuation that's been given; the reasons for this conclusion are almost logical.

Engagement: The most fundamental of problems
There's a rather large fundamental problem with Twitter's business model, and that is engagement.

Twitter is a great tool, exciting, and even liberating if you're well-known, but for the average person, it could undoubtedly be seen as a waste of time. This is a core difference between Twitter, Facebook, and even LinkedIn, which can be identified in most people's engagement levels on each social media site.

For example, on Facebook, I have about 800 friends, and on a typical post, it's not abnormal to get anywhere from 20-30 likes or comments. In terms of engagement, that means that 2.5% of my audience are engaged with a typical post. Then, on Twitter, I have approximately 9,706 followers, and I consider a good tweet one that earns 10 retweets or follows. This translates into 0.10% of my audience engaged. Finally, on LinkedIn it is even worse: With nearly 1,000 connections, I rarely receive any comments or likes on posts. In fact, just one comment and like in the last seven posts, both of which came from the same connection.

While everyone is different, I tend to believe that my experiences are relatively standard across the board. For example, on Justin Bieber's most recent tweet regarding his latest movie, it gained 48,800 retweets out of 50.6 million followers, which translates to .09% of his audience being engaged.

With that said, such data corresponds well with recent Deutsche Bank research that 58.5% of users who quit Twitter had fewer than 10 followers. Hence, why would they stay? Who are they tweeting to? Themselves? It's these questions and the obvious answer that translates into the company's monthly active users growing just 4% quarter-over-quarter to 241 million and its timeline views falling 7% in the same period.

Why does this matter to investors?
Investors may wonder, why is user engagement information important? Well, ultimately we can translate it into the amount that advertisers are willing to pay for service, or how valuable advertisers consider each social media site.

For example, Facebook's average revenue per user (ARPU) is $6.73, which has risen dramatically in the last year as Facebook's users continue to grow and it implements more successful advertising products. In comparison, Twitter's is roughly $3, and part of the investment thesis for Twitter is that its ARPU will continue to rise. However, if engagement is sloppy, advertisers will notice, especially as it compares to Facebook.

In many ways we're seeing LinkedIn struggle with many of the same concepts. In its last quarter, its Talent Solutions growth slowed and the company painted a cloudy picture surrounding its Marketing Solutions. Last year the company grew revenue by 57%, but according to its 2014 guidance its growth will slow by 20% relative to last year. Perhaps this has something to do with its lack of engagement, and the fact that unique visitors fell by 3 million quarter-over-quarter to 139 million in its last quarter.

Final thoughts
Facebook is the one company of the three that is seemingly clicking on all cylinders, which can be traced back to its incredible engagement rates relative to its peers. This fact has it well positioned to thrive in an advertising business that is growing rapid, especially on mobile.

Last year, mobile advertising growth grew 105%, and is expected to grow 75% in 2014 to $31.45 billion. This revenue is up for grabs, and the fact that Facebook's mobile advertising revenue grew four fold in the fourth quarter of last year shows that it is in fact gaining market share, growing faster than the overall market.

According to Statista, 92% of 500 large marketing professionals stated that their company advertises on Facebook; Twitter and LinkedIn had 23% and 24%, respectively. This shows that advertisers are likely using multiple channels, but that nearly all are using Facebook. With many of the advertising tools in social media being relatively new, it makes sense that advertisers would try each for a period of time to track the level of engagement, which might temporarily drive revenue higher for sites with minimal engagement.

However, conventional wisdom suggests that companies with the best engagement will ultimately reign supreme in the fight for advertising dollars. Sure, advertisers might try all social media sites for a while, but this fact doesn't necessarily translate into higher ARPUs, and in the case of Twitter and LinkedIn, this could be damning to its stock.

In the end, fourth quarter earnings tell an obvious story, as LinkedIn and Twitter are seeing Timeline and unique users decline over a three-month span. On the other hand, Facebook continues to excel, and in looking at the most obvious reason, user engagement and successful advertising campaigns are most likely playing a large role. Hence, Facebook is not only the social media company of the present, but also the future.

Want Motley Fool's inside take on social-media investments? Our CTO is investing over $100,000 in this company
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers