A quick look at the performance of tech stocks in 2013 would definitely tell you the story of the phenomenal show put up by the new kid on the block, Twitter (NYSE:TWTR). Now, once this name comes up, investors and analysts jump in to concoct a convincing story by comparing this microblogging giant's successful IPO to a not-so-successful offer by the social-networking colossus, Facebook (NASDAQ:FB). As a matter of fact, Facebook's share price saw a poor gain of 0.7% in comparison to Twitter's 73% pop on the first day.
Underpricing at play
Well, such a massive jump for a company that has yet to turn a profit came as a surprise. However, as most analysts pointed out in great detail, the underpricing of the IPO was highly responsible for this phenomenal debut. The stock was priced at $26 on the first day, which prompted scores of investors to put their money into the company in hopes of getting a flowery valuation over a certain time period. Of late, Twitter's share price is experiencing high volatility, which has raised questions about the sustainability of the ongoing rally.
As per reports, online ad spending is anticipated to expand by approximately 15% in 2014, creating a considerable number of opportunities for online-marketing giants. There is no doubt about the fact that Google (NASDAQ:GOOGL) has been an undisputed king of online ads, which is essentially attributable to its absolute dominance in web search.
In 2013, Google grabbed a 40% share of the digital-ads market in the U.S, and this number is poised to grow in 2014. Even though the company has a robust presence across all platforms, it faces a reasonable threat from new entrants like Facebook and Twitter.
Expanding the product portfolio
Twitter recently made the announcement to offer retargeted ads to advertisers, a move to expand its portfolio of offerings that also includes video ads, promoted accounts, and other great avenues. The latest acquisition of MoPub will drive its mobile-ads business via a native ads feature, a highly talked about format in digital advertising. Mobile ads are going to be huge in the coming years because of an increase in the adoption of smartphones and enhanced connectivity in emerging economies, and the company is doing it right by strengthening its presence in mobile-driven marketing.
Facebook is gaining strength
While Twitter is beginning to make inroads into the digital-advertising market, Facebook has grabbed the second spot in the U.S market because of an exceptional performance on the mobile platform. Facebook's mobile ad share jumped to 16% in 2013, and as per estimates, its share of the overall U.S digital- ads market is expected to touch 9% by 2015. Well, this is great news for Facebook investors, who were definitely dismayed by the company's debut in the stock market way back in 2012.
Though the stock has experienced significant volatility, its sincere efforts at innovation and the expansion of its product portfolio have reinstated the confidence of shareholders. The stock price has almost doubled over the past 12 months and is now fairly valued in keeping with the revenue number of the company. The year 2014 would be a highly eventful year for Facebook in terms of advertising revenue generation and building a concrete position in the mobile ads space. The release of graph search on mobile will be a big game changer for the company's product portfolio.
Twitter is overvalued
Getting back to Twitter, there is little doubt about the fact that it is going to rattle the cages of giants like Google and Facebook. However, the share price has rallied quite quickly and without the backing of any solid numbers. Recently, the stock hit an all-time high of $73; that is a boost of around 180% from its offer price.
One strong reason behind these swings is the immense trust that investors have placed upon Twitter's potential to make big money in the industry. The company is still designing a product portfolio for its clients and every instance of the addition of new features or tools is generating a wave of optimism among shareholders.
Twitter as a company has gained an unparalleled support from people across the globe because of its ability to serve quick and precise content. However, the stock is overvalued at this point in time, primarily because of bullish perceptions about its long-term operations. Hence, it is not prudent to invest in a stock that is constantly experiencing considerable volatility after a solid start.
A better option would be to include Facebook in your portfolio, as it has established a good foothold in the advertising space and is set to invade the mobile-ads space with the help of efficient innovation. The next couple of years should see a sizable expansion in the operations of the company, which will generate greater returns for shareholders.
Mihir Mehta has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Twitter. The Motley Fool owns shares of Facebook and Google. 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.