Better Buy: Twitter Inc. or Weibo Corporation?

Weibo (WB 0.43%) is often referred to as the "Twitter (TWTR) of China." Its microblogging platform, which is widely used by Chinese celebrities and brands, resembles a beefed-up version of Twitter that incorporates elements of Facebook, Reddit, and news portals.

In the past Weibo was widely considered a better growth stock than Twitter; it had superior growth in monthly active users (MAUs), revenue, and profits. However, shares of Weibo have tumbled more than 30% this year as shares of Twitter surged nearly 30%.

Image source: Getty Images.

Let's look at why investors now favor Twitter over Weibo, and whether or not this trend will last.

How fast are Weibo and Twitter growing?

If we compare Weibo and Twitter's MAU and revenue growth over the past four quarters, we'll notice that the former is still posting much stronger growth than the latter.

Columns represent year-over-year growth. Source: Weibo and Twitter.

In addition to posting stronger overall growth, Weibo's most recent total MAU count of 431 million tops Twitter's 335 million MAUs. However, Weibo's MAU and revenue growth are gradually decelerating, mostly due to the law of large numbers.

Twitter's year-over-year MAU growth remains stable (despite sequential declines caused by the suspensions of abusive accounts), but its revenue growth is accelerating. Twitter attributes that growth to cheaper ads, which have attracted more advertisers, offsetting lower ad prices with higher volume purchases. Another factor is Twitter's strength in international markets (which make up over half of its revenue), which is compensating for slower growth in the US.

Analysts expect Twitter's revenue to rise 19% this year, compared to a 3% decline last year. Weibo, which posted 75% sales growth last year, is expected to report 56% growth in the current twelve-month period. Investors generally favor stocks with accelerating sales growth, which explains why Twitter is outperforming Weibo this year.

Image source: Getty Images.

How profitable are Weibo and Twitter?

Weibo is consistently profitable by both GAAP and non-GAAP measures. Last quarter, the company's GAAP net income surged 92% against the prior year to $140.9 million, and its non-GAAP net income rose 80% to $156.1 million. Weibo's non-GAAP earnings per share (EPS) improved 79% to $0.68 per share, and analysts expect 53% growth for the full year, compared to 120% growth in 2017.

Twitter was only profitable by non-GAAP measures in the past, but that changed over the past three quarters as it became profitable on a GAAP basis. The platform reported a GAAP profit of $100 million last quarter (which included a $42 million tax benefit), compared to a profit of $51 million in the first quarter of 2018 and a profit of $91 million in the fourth quarter of 2017. Analysts expect Twitter's non-GAAP earnings to rise 59% this year, compared to 19% growth in 2017.

Once again, Twitter's improving GAAP profitability and accelerating non-GAAP EPS growth outshine Weibo's solid -- but decelerating -- earnings growth. Moreover, Twitter remains mostly immune to the escalating trade tensions between the US and China since it's blocked in the People's Republic. Weibo, however, could struggle with lower ad spending if businesses start to buckle under fresh tariffs.

We can see why investors were more excited about Twitter than Weibo, but Twitter's year-long rally has also made the stock more expensive. Twitter currently trades at 44 times this year's non-GAAP earnings estimate. Weibo, which was often considered an overheated growth stock, now trades at 25 times this year's non-GAAP earnings estimate.

The winner: Weibo

I think Twitter is making great progress, but I think its stock is priced for perfection. Meanwhile, investors are ignoring the fact that Weibo's growth won't decelerate forever: Trade headwinds should fade, and its valuations are near all-time lows. I'm not eager to pull the trigger on either stock right now, but I think Weibo is the better bet at the moment.