Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD.DL) have both been crushed over the past 12 months due to concerns about slowing user and sales growth. Twitter shares have fallen nearly 70%, while LinkedIn shares have plunged over 60%. Investors clearly hate both stocks, but is there a chance that one social network can rebound faster than the other?
What's wrong with Twitter?
Twitter's biggest problem is its lack of user growth. Last quarter, Twitter's monthly active users (MAUs) only rose 9% annually to 320 million -- its slowest growth since its IPO. On a sequential basis, growth remained flat. Excluding SMS Fast Followers (people who only use Twitter via text messages and don't see ads), MAUs actually declined 0.7% sequentially to 305 million.
On the bright side, Twitter's revenue rose 48% annually to $710 million, indicating that it can still squeeze out more revenue per user with new ad products. However, that growth represents a slowdown from 58% growth in the previous quarter and 97% growth in the prior year quarter. For the current quarter, Twitter expects sales to only rise between 36% to 40%. Adjusted EBITDA margin is expected to remain between 25% and 27%, compared to 27% last quarter.
After co-founder Jack Dorsey returned as Twitter's CEO last October, the company curated its "best" tweets with Moments, replaced Favorites with Likes, dabbled with non-chronological tweets, tested ads for logged-out users, and launched conversational ads to encourage users to reply to promoted tweets. It also finally integrated Periscope's live videos into its timeline. Unfortunately, none of these efforts are bringing new users to the platform yet, and Twitter's sales growth will likely keep declining as it runs out of ways to monetize its existing users.
What's wrong with LinkedIn?
At first glance, LinkedIn's numbers look better than Twitter's. LinkedIn doesn't report MAUs, but it stated that registered members rose 19% annually and 5% sequentially to 414 million. However, unique visiting members (which are similar to MAUs) only rose 7% annually and remained flat sequentially at 100 million, down from 22% annual growth a year earlier. Total revenue climbed 34%, compared to 37% growth in the previous quarter and 44% growth a year ago.
Last quarter, LinkedIn's talent solutions (for employers) revenue rose 45% annually to $535 million and accounted for 62% of LinkedIn's top line. Within that total, hiring revenue rose 32% to $487 million while learning and development revenue (from the Lynda acquisition) totaled $49 million. Marketing solutions (ad) revenue rose 20% to $183 million, thanks to sponsored updates growth offsetting a decline in traditional display ad sales. Premium subscriptions (for jobseekers) revenue rose 19% to $144 million, thanks to its Sales Navigator tool.
But looking ahead, LinkedIn expects its field sales hiring solutions business (64% of 2015 sales) to post just mid-20% growth in 2016, down from 30% growth in 2015 and 46% growth in 2014. The company attributed that slowdown to weakness in overseas regions and soft demand for self-serve hiring products. In the ad business, LinkedIn will shutter its stand-alone Lead Accelerator B2B product and integrate those features into sponsored updates. That shift is expected to throttle its marketing solutions sales growth in the short term. As sales growth slows, LinkedIn plans to keep capex in a "high-teen" percentage of its 2016 revenue. Analysts weren't pleased, and the company was slammed by nearly a dozen downgrades after its conference call.
Twitter has two advantages
Twitter and LinkedIn both have major problems, but the former has two notable advantages over the latter. First, Twitter and LinkedIn are both unprofitable on a GAAP basis, mainly due to stock-based compensation. However, Twitter has attempted to reduce that figure, but LinkedIn hasn't. Last quarter, Twitter's stock-based compensation fell 12.5% to $155 million, or 22% of its revenue, thanks to an 8% reduction of its workforce. LinkedIn's stock-based compensation rose 44% annually to $135 million, consuming 16% of its top line.
Second, Twitter's business model has fewer moving parts -- 90% of its revenue comes from ads (Promoted Tweets, Trends, Videos), while 10% comes from its data licensing business. By comparison, LinkedIn's business model is becoming more complicated every year, with new services, unbundled apps, and educational services all trying to squeeze more revenue from of its stagnant user base.
Whereas Twitter seems to be gradually pulling the fragmented pieces of its ecosystem together, LinkedIn's platform is becoming a sprawling mess. I believe that difference might make Twitter a more compelling acquisition target than LinkedIn.
Twitter's better, but just barely
Those two strengths make Twitter a more likely turnaround play than LinkedIn, but I can't recommend buying either stock right now. Twitter's stock will likely remain under pressure until MAU growth improves. LinkedIn's slowing revenue growth, elevated expenses, and ecosystem fragmentation also raise too many questions about its future.
Both stocks also can't be considered cheap yet. Twitter's P/S ratio of 4.4 and LinkedIn's P/S ratio of 4.6 still remain higher than the industry average of 3.4. Therefore, Twitter and LinkedIn aren't compelling buys today, but contrarian investors should keep an eye on these aforementioned metrics to see if they can become worthy turnaround plays.
Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.