Better Bad News Buy: Twitter Inc or LinkedIn Corporation?

Shares of Twitter (TWTR) and LinkedIn (LNKD.DL) recently sank after both social networks disappointed investors with lackluster earnings. Twitter fell nearly 20% on April 28, while LinkedIn plunged 25% on April 30. Should contrarian investors swoop in after those big declines, or do both stocks have more downside ahead?

Source: Pixabay.

Top and bottom line growth
Let's compare Twitter and LinkedIn's top and bottom line growth in their most recent quarters against analyst estimates.

Source: Earnings reports, Thomson Reuters estimates. *non-GAAP diluted **Twitter's EPS was $0.00 a year earlier.

Based on those numbers, LinkedIn looks like it's in better shape than Twitter. However, the bar was set considerably higher for Twitter's top line growth. 

Twitter generates most of its revenue through advertising, but 11% of its revenue last quarter came from the data licensing business, which delivers tweets to businesses via "firehose" feeds. LinkedIn generates revenue from three units -- "talent solutions" for connecting recruiters to candidates, "marketing solutions" for display ads, and "premium subscriptions" with additional features.

Unfortunately, neither company was profitable on a GAAP basis. LinkedIn posted a net loss of $43 million, down from a loss of $13 million a year earlier. During that period, Twitter's net loss widened from $132 million to $162 million. Twitter spent a whopping $183 million, or 42% of its revenue, on stock-based compensation. By comparison, LinkedIn spent just 16% of its revenue, or $103 million, on stock bonuses.

Lackluster guidance
Twitter and LinkedIn both issued top line guidance that missed analyst estimates. 

Source: Earnings reports, Thomson Reuters estimates.

Twitter had to lower its guidance due to its new pricing model. The company originally charged advertisers for any kind of ad engagement, including retweets and favorites. But over the past two quarters, Twitter only charged advertisers for the clicks that they want -- such as a website visit or app installation. Due to that change, Twitter now charges advertisers less money for fewer clicks.

LinkedIn blamed the strong dollar for gobbling up overseas revenue, and an impact from its upcoming $1.5 billion acquisition of e-Learning site Lynda.com. LinkedIn stated that it expects to generate $20 million to $25 million in revenue from Lynda this year, but testing out different types of integration for the site will reduce next quarter's revenues.

Nonetheless, the slowdown in sales growth at both companies is alarming. If Twitter generates revenue of $2.27 billion this year, it would represent just 62% annual growth. By comparison, the company's annual revenue rose 110% and 111% annually in 2013 and 2014, respectively. LinkedIn's projected revenue of $2.9 billion would equal 31% annual growth, compared to 57% growth in 2013 and 45% growth in 2014.

Slowing user growth
Both Twitter and LinkedIn are struggling with user growth.

Last quarter, Twitter's monthly active users (MAUs) only rose 18% year-over-year to 302 million. That's a slowdown from 20% growth in the previous quarter and 25% growth in the prior year quarter. Back in 2013, Twitter CEO Dick Costolo believed that the network would have 400 million MAUs by the end of the year -- which would now take several years to reach at its current growth rate. On the bright side, Twitter's quarterly ARPU rose 47% year-over-year to $1.44, thanks to new marketing tools which maximize revenue growth per user.

LinkedIn doesn't measure user growth in MAUs. It reports total active members and unique visiting members per month, which are both slowing down. Last quarter, total active members rose 23% year-over-year to 364 million, compared to 36% growth a year earlier. Unique visiting members rose just 18% to 97 million, compared to 26% growth in the prior year quarter. This means that just 27% of LinkedIn's members visit the site on a regular basis. LinkedIn's quarterly ARPU also grew at slower rate than Twitter's, rising 9% annually to $1.75.

Plans for the future
Twitter and LinkedIn are both trying to diversify their businesses to keep growing. Twitter added plenty of new features, like Promoted Videos, video editing and streaming tools, group chat, e-commerce partnerships, and even mobile payments to bolster the platform's appeal to advertisers.

LinkedIn acquired companies like social content site SlideShare, news reader Pulse, job matching service Bright, ad company Bizo, and Lynda.com to diversify its business. It also unbundled its services into separate apps to create its own mobile ecosystem. Those initiatives are aimed at bringing more of its active members back to the site on a regular basis.

The verdict
Both Twitter and LinkedIn face major challenges ahead. However, I'd still pick Twitter over LinkedIn for four reasons. First, its ARPU is rising much faster than LinkedIn's. Second, its new services are mainly focused on bolstering its core News Feed. LinkedIn, however, hopes that its scattergun approach can draw users back to its main site. Third, the growth of Twitter's data licensing business could eventually diversify its top line away from advertising. Lastly, LinkedIn's core business could be disrupted by Facebook's (NASDAQ: FB) new "Facebook at Work" site, which lets businesses create their own social networks.