Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) established many foundational elements that define social media today, but they are very different companies. For example, the former has been called before Congress and fined by the Federal Trade Commission, while the latter is a favorite tool of President Trump.

Assessing which is the superior investment comes not from comparing these two as social media entities, but rather in how each approaches its business. Here's an examination of why one is clearly a better buy than the other.

Man uses his finger to tap one of many thumbs up icons representing the Facebook Like button floating in front of him like ghosts.

Image source: Getty Images.

Facebook's diversification plans

Facebook depends on advertising for nearly all its revenue. In its last reported earnings, for the 2019 fourth quarter, $20.7 billion of its $21 billion in revenue came from advertising.

Over the years, the company has tried to diversify its income stream with moves including the acquisition of virtual-reality equipment maker Oculus, and the introduction of a cryptocurrency called Libra. So far, these efforts have not translated into significant revenue.

Yet its most promising opportunity might be its work on e-commerce and payments. During Facebook's last earnings call, CEO Mark Zuckerberg talked about one example in the company's work here: payments through its messaging application WhatsApp. "You'll be able to send money as quickly and easily as sending a photo," Zuckerberg said. The company plans to allow consumers to make purchases from businesses through messaging.

Messaging isn't the only area where the company is applying e-commerce and fintech capabilities. Facebook is looking to open this up across all of its properties, from its classifieds platform called Facebook Marketplace to Instagram.

Incorporating more e-commerce and payments into its business can lead to a new revenue source capable of rivaling its advertising sales. For instance, PayPal was once a division of eBay before growing to become its own company, and Alibaba created its Alipay payments app to assist its e-commerce ambitions, then spun it off as a separate company.

With a 25% year-over-year revenue increase in the fourth quarter and a 27% jump for the full year, Facebook's advertising business is doing well. So it's admirable that Facebook is not resting on its laurels, and is instead seeking new opportunities. Tackling the e-commerce and payments arena seems like Facebook's best chance to extend revenue beyond advertising. 

Twitter's myopic ad focus

When I first wrote about Twitter during its IPO debut, I had high hopes for the stock. Yet while other technology stocks (like Facebook) achieved explosive revenue growth over the years, Twitter oscillated between streaks of success and periods of disappointment. Even so, the company managed to make slow, steady revenue progress, as this chart shows.

Graph showing Twitter's quarterly revenue on a slow, steady upward trajectory from 2013 to 2019.

Data by Ycharts.

Twitter achieved this growth through advertising. Like Facebook, Twitter relies on ads for most of its income; $885 million of its $1 billion in revenue for the 2019 fourth quarter came from ads. Unlike Facebook, Twitter's corporate objectives maintain a focus on improving its current business, not extending beyond it.

Given its successful fourth-quarter earnings report, I can see why Twitter wants to double down on what it's currently doing. It was the first time the company made $1 billion in a quarter. Not only did revenue reach a record high, so did average monetized daily active users (mDAUs), which increased by 21% to 152 million. The mDAU count is important because it represents the number of users Twitter can show ads to, affecting how much revenue the company can generate.

Yet Twitter's fourth-quarter success appears short-lived. The company withdrew its first-quarter and full-year guidance on March 23, citing the novel coronavirus pandemic as a reason to expect Q1 revenue to decline year over year. This is despite quarter-to-date mDAU reaching another new high of approximately 164 million. Once again, Twitter's fortunes turn from success to question marks. The company can't seem to get a break, even though it will survive this period of uncertainty.

The final verdict

Despite Twitter's ability to keep chugging along, it has no plans to diversify beyond its reliance on ad revenue. Meanwhile, Facebook proves with its pursuit of e-commerce and fintech that it's a company looking for new opportunities. 

By looking beyond ad revenue, Facebook is improving its chances of moving past its reliance on advertising, which would make it a stronger company in the years ahead. Twitter's focus on ads will limit its growth when advertising declines during an economic downturn. For these reasons, between the two, Facebook is the better buy.