Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD) represent two opposite sides of the social networking market. The former is designed for family and friends, while the latter hosts professional profiles. Both companies are highly disruptive -- Facebook crushed MySpace, and LinkedIn is destroying Monster Worldwide.

Image

Sources: Pixabay, Flickr.

Facebook and LinkedIn aren't direct competitors, but investors might wonder which social networking stock is a better long-term investment. Let's break down these two companies' business models and valuations to see which stock comes out on top.

Members and revenue growth
Last quarter, Facebook's monthly active users, or MAUs, rose 14% year over year to 1.35 billion, while its daily active users, or DAUs, climbed 19% to 864 million. Mobile MAUs grew 29% to 1.12 billion. LinkedIn reported that its membership roll rose 28% to 332 million, but only 90 million visited the site on a monthly basis. Although Facebook is much larger than LinkedIn, the companies make money in very different ways.

Facebook makes money through advertising, which accounts for 92.5% of its top line. Mobile advertising revenue accounted for 66% of that total, up from 49% a year earlier, which highlights the company's increasing dependence on mobile users.

LinkedIn has three business segments -- talent solutions (connecting recruiters to candidates), marketing solutions (display ads), and premium subscriptions (which unlock additional features for users). Last quarter, talent solutions accounted for 61% of its revenue, marketing for 19%, and premium subscriptions for 20%. Talent and marketing revenue both rose 45% year over year, while premium revenue climbed 43%.

What the future holds
Facebook's long-term future centers around four key operations -- keeping revenue from mobile ads flowing, rolling out more profitable video ads, monetizing its disconnected subsidiaries (Instagram, WhatsApp, Oculus), and expanding into untapped markets like China.

LinkedIn, which lists China as its second-largest source of growth after the U.S., is redesigning profiles, encouraging use of its unbundled stand-alone apps (Connected, Pulse, Recruiter), and expanding into the $50 billion business-to-business marketing space via its $175 million acquisition of Bizo.

Valuations and sustainable growth
When we compare Facebook and LinkedIn's valuations, a clearer picture of the two companies emerges.

 

P/S (ttm)

Fwd. P/E

5-year PEG

ROE (ttm)

Operating Margin (ttm)

Debt-to-equity

Facebook

18.7

39.1

1.2

16.1%

44.4%

1.3

LinkedIn

14.1

83.4

3.0

(0.5%)

1.7%

No debt

Advantage

LinkedIn

Facebook

Facebook

Facebook

Facebook

LinkedIn

Source: Yahoo! Finance, Nov. 12.

Facebook is the superior stock in terms of bottom-line growth, margins, and ability to turn investor dollars into profits. LinkedIn is cheaper on a price-to-sales basis, but it has clear bottom-line issues. In looking at Facebook and LinkedIn's top and bottom-line growth over the past two years, the difference between the two companies becomes painfully obvious.

FB Revenue (Quarterly) Chart

Source: YCharts.

LinkedIn, like many high-growth tech stocks, can't squeeze out a profit despite its robust revenue increase. Last quarter, the company reported that revenue rose 45% year over year to $568 million -- a notable slowdown from 47% growth in the previous quarter. LinkedIn's net loss widened from $3.4 million to $4.3 million, due to total costs and expenses climbing 44% to $560 million. By comparison, Facebook's revenue rose 59% to $3.2 billion last quarter as its net income surged 90% to $806 million, while cost and expenses rose 41% to $1.8 billion.

Sales and marketing costs equaled 35% of LinkedIn's revenue last quarter, compared to 12% for Facebook. This means that although LinkedIn is spending more on marketing than Facebook, it is still pumping out lower revenue growth.

The verdict
LinkedIn underperformed Facebook and the overall market in 2014 for four reasons: its top-line growth is slowing down, it is nowhere near generally accepted accounting principles-adjusted profitability, its monthly active user base is unimpressive, and its app un-bundling and business-to-business strategies are questionable. Meanwhile, Facebook tops LinkedIn in terms of stable top and bottom-line growth, sustainable valuations, and a clearer plan for its future. Therefore, Facebook is undeniably the more reliable social networking stock to invest in.

Leo Sun owns shares of Facebook. 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.