Better Buy: Facebook, Inc. vs. Line Corp

Which social networking stock is the better long-term play?

Leo Sun
Leo Sun
Jun 18, 2017 at 5:31PM
Technology and Telecom

Facebook (NASDAQ:FB) and Line (NYSE:LN) are both social networking companies, but their fortunes have diverged over the past year. Line went public last June at $32.84, finished its first trading day at $42, and rose to almost $50 last September. But since then, Line fell back to around $36 -- representing less than 10% growth from its IPO. Facebook, on the other hand, rallied nearly 30% over the past 12 months.

Should investors shun Line and buy Facebook instead? Let's examine both companies' business models, growth rates, and valuations to find out.

A man uses a smartphone.

Source: Getty.

How do Facebook and Line make money?

Facebook generates most of its revenue from ads across its namesake social network, its mobile app, and its Messenger stand-alone app. 98% of its revenue came from ads last quarter, with mobile ads accounting for 85% of that total. Facebook also generates revenue from Instagram, but it includes that amount within its total ad revenues and doesn't disclose any exact figures.

Facebook also owns WhatsApp, but it plans to monetize the platform with payments and enterprise services instead of ads. The remaining 2% of Facebook's top line comes from payments and other fees.

Line's mobile app.

Line's mobile app. Source: Google Play.

Line's business is divided into four categories: ads, communication, content, and others. Last quarter, 43% of its revenue came from ads (in its messaging app, timeline, and sponsored stickers), 21% came from communication (paid stickers, themes, and its Skype-like Line Out service), 27% came from content (games, music, and comics), and the remaining 10% came from other products (including its mobile payment, job search, and wireless services).

Line generated 73% of its revenue from Japan during the quarter, and the remaining 27% came from overseas markets. Its key overseas growth markets include Taiwan, Thailand, and Indonesia.

How fast are Facebook and Line growing?

Facebook's revenue rose 54% annually to $27.6 billion in 2016, and analysts anticipate 39% growth this year. Those impressive figures are supported by its robust growth in MAUs (monthly active users). Facebook's MAUs rose 17% annually to 1.94 billion last quarter, making it the biggest social network in the world by a wide margin.

Moreover, Facebook also reaches 700 million MAUs with Instagram, while WhatsApp and Messenger each have 1.2 billion MAUs. Facebook is also expanding that ecosystem by turning Messenger into an all-in-one "super app" for payments, deliveries, and other services; adding ephemeral features to Instagram to counter Snap's Snapchat; and turning WhatsApp into a business-oriented tool.

Some investors were concerned about Facebook's heavy spending before, but the company is still growing profits hand-over-fist. Its earnings rose 85% in 2016, and Wall Street expects 15% growth this year.

Facebook's mobile app.

Facebook's mobile app. Source: Google Play.

Line's revenue rose 17% to 140.7 billion yen ($1.3 billion) in 2016, and analysts expect 36% growth this year. On the bottom line, Line posted a net profit of 7.9 billion yen ($71 million) last year, which was a vast improvement from its net loss in 2015. However, neither the company nor analysts have provided forward earnings guidance for Line, so it's unclear if it can stay profitable this year.

Line's MAUs in Japan, Taiwan, Thailand, and Indonesia rose 13% annually to 171 million last quarter. That double-digit growth is encouraging, since the bears argue that Line could be rendered obsolete by bigger apps like Facebook Messenger and WhatsApp.

However, Line's worldwide MAUs have actually been dropping. Line stopped reporting that figure after the fourth quarter of 2016, when its worldwide MAUs rose just 1% annually (but fell 1% sequentially) to 217 million. This means that Line's dependence on its four core markets will continue rising as its usage declines across other countries.

The valuations and verdict

Line trades at a whopping 100 times earnings, but that's still slightly lower than the industry average P/E of 107 for application software makers. Facebook has a P/E of 38, which is marginally higher than the industry average of 37 for internet information providers.

In the end, Facebook is clearly the better investment. Its stronger MAU growth, wider moat, better revenue and earnings growth, and lower valuation all make it a smarter play than Line at current prices.

Editor's note: This article has been corrected to state that Line generated 73% of its revenue from Japan during the quarter, and the remaining 27% came from overseas markets.