Twitter (NYSE:TWTR) is a nerve-racking situation. It is not the service that should give you the willies. The user experience is fun and easy. However, from an investing perspective, the new publicly-traded company's valuation should scare you out of your wits.

There is a big difference from being a good company and a great investment. Here are some major things to keep in mind before placing your buy order.

Valuation
The company went public about a month ago at $26 a share. Since then, the stock price has nearly doubled to $51.61. The market cap is over $28 billion.

In determining the value of restricted stock units (RSUs), Twitter determined a value of $17 a share in May of this year. Underwriters initially placed a value of $17 to $20 a share.

In other words, in just a few short months, the value of the company has tripled from the low end of the initial price range that experts initially gave the company.

Why should this make investors queasy? For starters, Twitter does not make any profit. From 2010 through 2012, the company lost $67.3 million, $128.3 million, and $79.4 million, respectively.

This year produced the same result. For the first nine months of this year, revenue more than doubled to $422.2 million, but its loss almost doubled from about $71 million to almost $134 million.

Advertising is responsible for generating most of its revenue. So far, this year it accounted for 89% of its top line. Ad spending will be affected in the event the economy slows down. There are also many places advertisers can put their money, including websites and traditional media.

Lots of competition
This brings up another point. Social media has attracted a lot of attention as users have discovered the benefits. Users can reunite with old friends, and long distance friends and family can keep up-to-date on the latest happenings. However, that means there are many competitors attracted to the space. Behemoth Facebook (NASDAQ:FB) had almost 1.2 billion monthly active users (MAUs) worldwide as of September 30. Given the user base is four times the size of the United States, it makes it a very attractive platform for advertisers.

Twitter had 232 million MAUs. This is nothing to sneeze at, but much less than Facebook.

Speaking of Facebook, the company has managed to become profitable. For the nine month period, the company earned $971 million, or $0.39 a diluted share, versus a loss of $11 million, or $0.01 a share a year ago. The number of shares used to calculate diluted EPS rose 33% to 2.5 billion, it should be noted.

The company also has a clean balance sheet. As of September 30, Facebook had $9.3 billion of cash and marketable securities and no debt. The firm is a cash-producing machine, generating $2.1 billion in free cash flow for the first nine months of 2013.

Twitter's balance sheet is also in decent shape, with over $320 million in cash and marketable securities and no debt. However, Twitter does not generate free cash flow at this point. For the first nine months, it was negative $42.4 million as it outspent the $4.3 million in operating cash flow on capital expenditures.

LinkedIn (NYSE:LNKD) is a social media site that specializes in professionals. Aside from advertising, the company also gets its revenue from subscribers paying for a premium membership and employers that pay to post jobs on the site.

As of September 30, the company had $2.2 billion of cash plus short-term investments and no debt. Its results were also impressive. For the first nine months of the year, the top line was up 62%, to almost $1.1 billion, but the bottom line jumped even more, increasing by 127.5%, to about $23.0 million. LinkedIn's diluted earnings per share for the period was $0.20 versus $0.09.

Despite markedly increasing spending on property and equipment, LinkedIn's free cash flow was over $133 million, compared to about $104 million a year ago.

Final thoughts
Twitter's stock price surged by almost 16% this week after the company announced it was enhancing its advertising offerings. The stock has risen very far in a short time period.

Facebook has an established position in the marketplace. However, new entrants could take share, particularly among younger users as their parents migrate to Facebook. LinkedIn has a nice niche among professionals. Both are superior investments to Twitter at this juncture. However, the entire social media sphere is difficult to value, since there is a lot of competition and changing technology means the next new thing is around the corner.

Fool contributor Lawrence Rothman has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.