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.
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.
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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.