Facebook dominates generalized social media in the U.S. Despite this power, it has not unseated Twitter in the microblogging universe. And both Facebook and Twitter have dealt with positives (much wider engagement on both sites because of the lockdowns) and negatives (a decrease in business and advertising spending) related to the COVID-19 pandemic.
While Facebook is the much-bigger company between the two, size may not give it an advantage with current or prospective investors looking for certain qualities.
Let's look at both companies to see which stock might be the better buy right now.
Where Facebook stands
Facebook remains the 800-pound gorilla among communication stocks specializing in social media. At a market cap of $700 billion, Facebook is several multiples larger than Twitter, Pinterest, and Snap combined.
Facebook-owned sites boast over 2.7 billion monthly active users, with around 1.79 billion of them logging in daily on average. Also, according to SensorTower, four of the eight most downloaded apps are owned by Facebook. Considering that 35% of the world's 7.7 billion people log on to a Facebook site, some might worry about saturation. However, to further growth, Facebook has turned to virtual reality (VR).
The company seems to have gained a first-mover advantage in VR. Also, Facebook's 40% year-over-year increase in non-ad revenue in the second quarter indicates that it has capitalized on this lead. Furthermore, industry growth could bolster its goals. Grand View Research forecasts a compound annual growth rate (CAGR) for the VR industry of 21.6% through 2027.
Even with little help from a pandemic, Facebook remains on a growth trajectory. In the most recent quarter, overall revenue climbed 11% from year-ago levels. Moreover, quarterly earnings of $1.80 per diluted share nearly doubled from the same quarter last year.
As of this writing, Facebook stock trades at less than 24 times forward earnings. Given the forecast of almost 25% earnings growth this year, investors can buy this growth at a relative bargain.
The state for Twitter
Twitter has become a forum for popular figures in both entertainment and politics, most notably President Donald Trump. However, despite its popularity, Twitter has faced growth struggles as it must compete with Facebook and other social media sites for attention. At a market cap of just over $31 billion, its size is a small fraction of Facebook's.
As mentioned before, interest in social media rose amid the pandemic. To this end, Twitter's mDAUs, or daily active users who can see ads, saw a 34% increase to 186 million compared with the same quarter last year.
However, Twitter took a revenue hit due to COVID-19. Revenue fell 19% from the same quarter last year, leading to a quarterly loss of $1.56 per diluted share. The company earned $1.43 per share in the same quarter the previous year.
Also, analysts expect Twitter to return to profitability beginning in the upcoming quarter. Still, profit growth remains erratic with a loss this year giving way to profits in 2021. Since the stock trades at almost 55 times forward earnings, it could struggle to gain traction under such conditions.
Nonetheless, despite the effects of COVID-19, Twitter could experience a resurgence. The company believes that product improvements helped play a role in driving user engagement higher. Additionally, Twitter recently completed an overhaul of its ad server. Such engagement and productivity gains could lead to increased profits over time.
Facebook or Twitter?
Despite Twitter's potential, I think Facebook will remain a more profitable investment. Indeed, 24 times forward earnings is a bargain for a company that will increase profits by approximately 25% per year for the foreseeable future.
However, the value proposition for Facebook stock goes beyond its multiple. Investors should note that the company increased ad spending during the worst economic downturn in decades. Moreover, Facebook's move into virtual reality increases the likelihood that it can maintain rapid growth even if the social media sites show signs of saturation.
Although Twitter should continue to grow in the near term, Facebook looks positioned to maintain its dominance and create new business lines to bolster its bottom line.