Despite the Recent Drop, Twitter Is Outperforming Peers

Peter Lynch once said that the short-term direction of a stock often has little to do with the company behind it. Twitter is a perfect example.

May 13, 2014 at 9:30AM

Twitter (NYSE:TWTR) investors haven't had a lot to cheer about recently. Shares have been hit with concerns about the stock's valuation and are sitting near a 52-week low. However, the long-term investing thesis hasn't changed. Twitter is still a terrific news outlet and real-time source of information. In addition, the company is outperforming two of its larger peers in three significant areas.

Users are anything but stuffed
The first area in which Twitter is outperforming peers Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is revenue growth. Facebook got a lot of press recently by reporting a 72% increase in overall revenue growth, and Google investors seem satisfied with the 19% revenue growth the company recently posted.

Twitter, on the other hand, posted annual revenue growth of 119%, which was even more than the prior quarter's revenue growth of 116%. In addition, advertising growth is speeding up as well. Last quarter, the company's advertising revenue rose 121% year over year, and this quarter the growth rate increased to 125%.

Even more important than Twitter's current revenue growth is its potential for future increases. Facebook is stuffing its mobile app with more advertisements and making desktop ads more prominent. Google already uses ads wherever it can, and the company tries to connect its ad network to as many partner sites as possible.

This is a key difference between Twitter and its peers. Twitter's promoted posts are rare and can be increased tremendously before users would even notice. In addition, none of Twitter's pages use display advertising, and on the desktop in particular, there is significant space for revenue growth in this way.

There may be concerns about Twitter's valuation, but investors have nothing to worry about when it comes to the company's revenue growth.

Serious about future growth
In the technology world, there seems to be a direct correlation between growth and spending on research and development. Companies that don't spend on R&D have trouble growing because expanding beyond their original business is a challenge.

The second way that Twitter continues to handily outperform peers is by spending significantly on R&D. In the current quarter, Facebook spent about 18% of revenue on R&D, while Google spent roughly 14%. By comparison, Twitter spent 60% of its current-quarter revenue on R&D.

While it's true that Twitter won't be able to continue spending this much on developing its business, the company must invest for future growth. Long-term investors should be willing to sacrifice net income in favor of research that may improve Twitter's business prospects.

You might not believe it
Some believe that companies using stock-based compensation are hindered from real cash flow growth. However, if the company is growing quickly, using stock as compensation can generate tax benefits and help keep top talent.

The third way Twitter is outperforming peers is the growth of its operating cash flow (excluding stock-based compensation). Facebook's core operating cash flow (net income + depreciation) increased by an impressive 100% year over year, while Google's cash flow increased by roughly 10%.

By comparison, Twitter's operating cash flow exploded upward by almost 300%. The company is blowing away the competition, if you look beyond short-term challenges. Twitter is still the only social media property that allows for real-time updates and information gathering.

With huge revenue growth, strong R&D spending, and core cash flow growth that far exceeds its peers, Twitter is a unique business. If you are a growth investor, this is a play on the dissemination of information. With the stock near a 52-week low, this is an excellent opportunity for long-term investors.

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Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (C shares), and Twitter. The Motley Fool owns shares of Facebook and Google (C shares). 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.

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