Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) are two of the most well-known social networks in the world. Nearly 2.4 billion people use Facebook's family of services -- which includes its namesake app, Messenger, Instagram, and WhatsApp -- each day. Twitter served only 166 million monetizable daily active users (mDAUs) last quarter, but it punches far above its weight in terms of social and political influence.
Facebook clearly impressed investors more than Twitter. Facebook went public at $38 eight years ago, and it now trades at about $230. Twitter went public at $26 per share seven years ago, but only trades at roughly $35 today.
Facebook dazzled investors with its robust growth in users and ad revenue, even as it faced increased scrutiny over its privacy and security practices. Meanwhile, Twitter disappointed investors with its slowing growth in users and ad revenue, while its shifting definitions of "active users" obfuscated its actual growth rates.
But, looking ahead, will Facebook remain a stronger investment than Twitter? Or will the underdog social network finally win over the bulls?
How fast are Facebook and Twitter growing?
Facebook generated 98% of its revenue from online ads last quarter. The remaining sliver came from its "other" businesses, which include its Oculus and Portal devices.
Facebook's ad revenue grew only 17% annually during the quarter, as the COVID-19 crisis curbed ad spending across multiple sectors, but its "other" revenues surged 80% -- fueled by sales of new Oculus headsets.
Its total revenue rose 18% to $17.7 billion, as its core platform's monthly active users (MAUs) grew 10% annually to 2.6 billion. Its operating margin expanded from 22% to 33%, and its net income more than doubled to $4.9 billion.
Twitter generated 84% of its revenue from its online ads last quarter. The rest came from its data licensing business, which sells a "firehose" feed of data to customers like news agencies and high-frequency trading platforms, and other sources like its mobile ad exchange MoPub.
Twitter's ad revenue inched up less than 1% annually during the quarter, mainly due to COVID-19 headwinds in March, but its data licensing and other revenues grew 17% as companies kept consuming its tweets.
Twitter's total revenue rose just 3% to $808 million, but its total mDAUs grew 24% to 166 million -- which indicates it's squeezing out less revenue per user. Its operating margin dropped from 12% to -1%, and it ended the quarter with a net loss of $8 million.
Identifying the main headwinds and tailwinds
Facebook and Twitter face similar challenges. Both companies are generating stronger growth overseas than in the U.S., but those international users generate lower average revenue per user (ARPU). Therefore, both companies need to invest more cash into those lower-margin markets to plant the seeds for future growth -- which could weigh down their near-term margins.
Facebook and Twitter both face slower ad spending as pandemic-impacted companies buy fewer ads, while escalating tensions with the Trump administration over the policing and fact-checking of posts could boil over into retaliatory regulations against both companies.
On the bright side, Facebook noted that usage of Messenger and WhatsApp significantly increased throughout the crisis, and it recently rolled out a big video conferencing upgrade for Messenger to widen its moat against Zoom Video Communications.
Twitter's user growth also remained robust throughout the crisis, and the company noted that more brands shifted from traditional ads to live streaming events, which are easier to execute than scripted ad campaigns. However, Facebook and Twitter's growth in users will likely burden their margins if their ad revenues dry up.
Analysts expect Facebook's revenue and earnings to rise 9% and 13%, respectively, this year -- but the stock isn't cheap at over 30 times forward earnings. Twitter's revenue is expected to dip 5% this year with an 84% drop in earnings, but the stock is even pricier at over 70 times forward earnings.
The winner: Facebook
Twitter will remain a major social media player, but cash-strapped advertisers will likely spend more money on top-tier ad platforms like Facebook and Alphabet's Google until the macro environment improves.
Facebook also faces near-term headwinds, but it has a much larger user base, includes a more diverse family of apps, and generates stronger growth at a lower valuation than Twitter -- which makes it a better buy at these levels.