Shares of Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD.DL) both recently plunged after their second-quarter earnings reports. Twitter beat analyst expectations on both revenue and earnings, but sluggish user growth and a lack of clarity about future plans caused the stock to plunge to an all-time post-IPO low. LinkedIn also beat top- and bottom-line estimates, but the stock plummeted near its 52-week low on concerns about the growth of its core business.
Twitter and LinkedIn are now respectively down 20% and 17% since the beginning of the year. Are either of these social networking stocks worth buying after their post-earnings dips? Or should investors steer clear and wait for lower prices?
Twitter and LinkedIn share a similar problem of sluggish user growth. Last quarter, Twitter's monthly active users (MAUs) rose just 15% annually to 316 million -- its slowest growth since going public. LinkedIn doesn't report MAUs, but its total member base grew 21% annually to 380 million users, versus 23% growth in the first quarter and 32% growth in the prior-year quarter.
Both companies are also experiencing a slowdown in revenue growth. For the full year, Twitter expects its revenues to rise about 60% annually this year, versus 111% growth in 2014. LinkedIn expects its full-year revenue to rise 33%, down from 45% growth last year.
Lastly, both companies are unprofitable on a GAAP-adjusted basis. Twitter posted a net loss of $136.7 million last quarter, a slight improvement from a loss of $144.6 million a year earlier. LinkedIn's GAAP loss widened from $1 million to a loss of $68 million, with $31 million attributed to the acquisition and integration of e-learning site Lynda.com.
Twitter's core problems
During Twitter's earnings call, CEO Jack Dorsey admitted that new features -- like Instant Timelines, group chats, video editing tools, and logged-out experiences -- didn't have a "meaningful impact on growing our audience or participation." CFO Anthony Noto warned that Twitter didn't "expect to see sustained, meaningful growth in MAUs until we start to reach the mass market," and that a turnaround would "take a considerable period of time."
Last year, Twitter introduced "direct response" ads, which were intended to attract smaller businesses by letting them only pay for the interactions they want. Unfortunately, that strategy backfired and caused companies to pay less money for fewer clicks. Despite those problems, Twitter's ad revenue rose 63% year over year to $452 million and accounted for 90% of its top line.
LinkedIn's core problems
Back in April, LinkedIn lowered its second-quarter revenue guidance, which caused analysts to lower their expectations. As a result, LinkedIn "beat" the lowered average estimate of $680 million, but "missed" the previous consensus estimate of $718 million. A surprising growth driver was Lynda.com, which contributed $18 million to LinkedIn's second-quarter revenue. LinkedIn also raised its earnings guidance for the full year, but a large portion of that gain will come from Lynda.com, raising concerns about the growth of LinkedIn's core business.
LinkedIn's display ad revenues declined 30% annually last quarter, causing the Marketing Solutions unit's year-over-year growth to fall from 38% in the first quarter to 32% in the second. A slowdown in that unit, which generated 20% of LinkedIn's sales last quarter, could pressure its other two businesses units -- Talent Solutions (for employers) and Premium Subscriptions (for jobseekers) -- to grow faster.
Facebook could crush both
Facebook (NASDAQ:FB), the world's largest social network with 1.49 billion monthly active users, could also throttle Twitter and LinkedIn's growth in the near future.
Like Twitter, Facebook has a first-party video platform, video ads, and buy buttons. It also beat Twitter to the punch with live curated content, which Twitter plans to feature with its upcoming "Project Lightning" initiative. Facebook also recently added live-streaming for celebrities to counter Twitter's Periscope. To challenge LinkedIn, Facebook launched "Facebook at Work," which lets businesses create their own internal social networks.
If Facebook aggressively tries to render Twitter and LinkedIn obsolete, both sites would need to spend more to remain competitive. That could result in wider losses down the road.
The verdict: Buy neither (for now)
For now, I believe investors should avoid both Twitter and LinkedIn for now. Both companies might eventually bounce back, but they face serious headwinds in the near term.
Twitter needs to prevent its user growth from slipping into the single digits, find advertising initiatives that work, and hire a permanent CEO. LinkedIn must demonstrate that it can still grow its user base without diluting its identity with new services like Lynda. Even if Twitter and LinkedIn can accomplish all of that, they still have to compete against Facebook, which could cause expenses to rise and losses to widen.