If You Like Twitter at $35, You’ll Love These 2 Stocks

Twitter (NYSE: TWTR  ) has bounced 15% off its $29.51 lows and appears to be headed back over $35 per share. The social media company has been criticized for its slowing user growth, as the need for better monetization tools have many wondering if it could ever support a $20 billion market capitalization. Nonetheless, Twitter trades at a steep price, so if you like it, you should love Weibo (NASDAQ: WB  ) and Facebook (NASDAQ: FB  ) .

China's version of Twitter
For 2014, Twitter's guidance for revenue of $1.22 billion implies annual growth of nearly 88%. Yet, with Twitter's monthly active users and Timeline views rising just 6% quarter over quarter in the first three months, Twitter is no longer a company that can grow its fundamentals with users. Instead, it must implement better monetization tools.

Therefore, Twitter has already said it will launch 15 new advertising products over the next six months. The company has also made moves to become more appealing to video advertisers, and recently launched an e-commerce partnership as well. With that said, Twitter executives have accounted for all of these moves and have expectations for this year, which are likely built into guidance.

Thus, with rapid user growth no longer relevant, and much of Twitter's future lying in its ability to monetize users, the stock's 15.5 times 2014 revenue expectation is rather steep. In the meantime, Weibo recently became public and has often been described as China's hybrid version of Facebook plus Twitter.

Weibo is a bit smaller than Twitter, but with $188 million in revenue last year, it grew 190%. For 2014, sales are expected to reach $400 million. Also, as of the fourth quarter of last year, Weibo is now profitable with an operating margin of 2%, compared to Twitter, which posted a first-quarter net loss of $132 million.

So, Weibo is profitable, growing faster than Twitter, and much more attractive at 10 times 2014's revenue. Hence, if you like Twitter, you have to love Weibo.

Facebook is another option
In social media, investors seek growth, large user bases, and strong management. Later, efficiency becomes important as well. Hence, Facebook has become the gold standard of social media.

Its 71.2% revenue growth in the first quarter, coupled with costs and expenses that rose just 26%, has created the most efficient, fast-growing company of the bunch, with operating margins over 40%. Even with 1.28 billion monthly active users, a large percentage of the world's population, Facebook is still growing its user base faster than Twitter.

Moreover, investors realize that much of Facebook's growth in the last year has been a result of mobile monetization, but looking ahead, the company has new ventures such as payment processing and video advertising that could take it to the next level of growth.

Overall, there are a lot of ways to monetize 1.28 billion users, and another billion on mobile devices. Currently, Facebook trades at 13 times this year's expected earnings, which falls in the middle of Weibo and Twitter. Yet, due to its profitability, the company trades at a mind-boggling 32 times forward earnings, which (in the technology sector) isn't too expensive given the company's growth.

Final thoughts
In technology and social media, there are a lot of investment options, yet an expensive Twitter has been one of the favorites following its IPO. Weibo, on the other hand, underperformed, while Facebook remains fairly valued relative to earnings.

Given this fact, and the overall risks associated with Twitter, Facebook looks like the best investment of the three, if not in the entire industry. Regardless, you've got to love Facebook and Weibo's valuation, especially if you like Twitter.

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  • Report this Comment On May 16, 2014, at 11:04 AM, Borisbmx wrote:

    Weibo, is probably a Twitter/Instagram hybrid. Because it doesn't go head to head with WeChat, the competitive situation is more like a information-news platform vs. a communcations platform, they may co-exist as separate niches. This Weibo news-information platform aspires for a 65% market share with some long runway growth factors. Weibo's true main competitiors are newspapers and other media varieties.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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