Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) represent two opposing sides of the social networking industry. Facebook's goal is clear: to connect users to family and friends, then simplify the sharing of personal thoughts, photos, and videos. Twitter's ultimate goal is more nebulous -- it's used more frequently to follow celebrities and companies on soapboxes, but it's also diversifying into media partnerships, mobile payments, video sharing, and group messaging.
As potential investments, the distinction between Facebook and Twitter is as clear night and day. Therefore, let's take a look at three simple reasons Facebook is a better long-term investment than Twitter in my book.
1. Follow the money
Simply put: while Facebook is profitable, Twitter isn't. Last quarter, Facebook's revenue rose 58% year over year to $12.47 billion as net income grew 34% to $701 million. Twitter's fourth quarter revenue rose 97% to $479 million, but it reported a net loss of $125 million -- which was nonetheless an improvement over a loss of $511 million in the prior year quarter.
Twitter attributes most of that loss to $177 million in stock-based compensation expenses. In other words, Twitter paid 37% of its quarterly revenue back to employees as bonuses -- the highest percentage of any stock in the S&P 1500. Handing out more stock options also dilutes existing shareholders' holdings, meaning that Twitter enriches employees at the expense of investors, even as its bottom line remains in the red.
Twitter's stock is also fundamentally pricier than Facebook's. Twitter trades at 61 times forward earnings, while Facebook has a forward P/E of 29. Facebook's five-year PEG ratio of 1.2, based on Thomson Reuters estimates, is also lower than Twitter's PEG of 1.7, indicating that its bottom line growth could continue outpacing Twitter's.
2. User growth
Last quarter, Facebook's monthly active users (MAUs) rose 13% year over year to 1.39 billion. That's a moderate slowdown from the 15%, 14%, and 14% MAU growth Facebook respectively reported in the first three quarters of 2014. However, we should recall that Facebook also owns WhatsApp and Instagram. WhatsApp's active users rose 63% year over year to 700 million in January, while Instagram's active users doubled to 300 million between September 2013 and December 2014.
Twitter CEO Dick Costolo once claimed that the social network would hit 400 million MAUs by the end of 2013. But in the fourth quarter, MAUs only rose 20% YOY to 288 million. That was a notable slowdown from the 25%, 24%, and 23% MAU growth Twitter respectively reported in the first three quarters of 2014. Twitter also owns Instagram rival Vine, which gives it roughly 40 million more registered (albeit not necessarily active) users.
In terms of average revenue per user (ARPU) based on their core sites, Facebook has an ARPU of $2.77 per quarter, compared to Twitter's quarterly ARPU of $1.66.
3. User value
To generate advertising revenue from marketers, both Facebook and Twitter need users to remain on their site to view more ads.
According to Alexa, the average Facebook user spends nearly 19 minutes per day on the site, compared to just over seven minutes daily per Twitter user. This means that marketers likely value Facebook's News Feed, display, and video ads more than Twitter's Promoted Tweets, Trends, and Accounts.
Nonetheless, Twitter's ARPU has risen over the past year despite its sluggish MAU growth, climbing 69% between the first and fourth quarters of 2014. By comparison, Facebook's ARPU rose 42% during that period. Twitter managed to boost ARPU by bolting on more services like marketing integration with TV ads, video ads, and cross-promotion hashtags with companies.
However, Twitter recently made a lopsided deal with Google (NASDAQ:GOOG) (NASDAQ:GOOGL), which allows Tweets to appear in Google's search results. If users click on Google's link, they will bypass Twitter's News Feed and go straight to the tweet. Twitter believes that this strategy will encourage more users to log in or sign up to read the tweet, but it undermines the value of the News Feed and could throttle ARPU growth.
By comparison, demand for Facebook's ads runs so high that the company limits the amount of ads it displays each quarter to drive up prices. That strategy has worked beautifully -- last quarter, the average cost of a Facebook ad rose 335% as it displayed 65% less ads than a year earlier.
In addition to being profitable and posting better ARPU growth, Facebook has more ambitious plans for the future, including a LinkedIn (NYSE:LNKD.DL)-like enterprise network, VR headsets, and a possible expansion into healthcare networking. Twitter, on the other hand, will likely face an identity crisis as it adds more services to become a smaller, more disorganized version of Facebook.
Leo Sun owns shares of Facebook. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), LinkedIn, and Twitter. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), LinkedIn, and Twitter. 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.