Social media stocks have become the present day equivalent of 2000-era dot.com boom issues; there’s lots of hype and hope but little or no money with the fascinating exception of Facebook (NASDAQ: FB). Naturally, this will have many people wondering about Twitter (NYSE: TWTR).
Twitter is, after all, a social media solution that is very similar to WhatsApp, the messaging app for which Facebook paid $21 billion in cash and stock last year. It is a widely used solution, particularly in the United States, where tweeting seems to have become a favorite pastime of celebrities, including Donald Trump and a publicly traded company.
The question value investors will ask about Twitter is the all-important one: Does it make money? The answer to that question, provided by Twitter’s financial numbers, is obviously no. The sorry truths revealed by those figures include:
- A net income of -$556.15 million for the third quarter of 2015.
- A profit margin of -23.13%.
- A diluted earnings per share figure of -0.859.
- A free cash flow of -$4.808 million.
- A return on equity of -14.38%.
- $327.15 million in cash from operations.
- Revenues of $1.987 billion.
- $3.489 billion in cash and short-term investments.
The only one of these figures that even looks good is the cash and short-term investments. None of these figures justify Twitter’s December 11 share price of $24.84 nor its $16.96 billion market capitalization. The $14.91 billion enterprise valuation is also very hard to justify here.
Why WhatsApp Could Be Worth $21 Billion and Twitter Is Not
Naturally, many people will be wondering what is going on here. Why was Mark Zuckerberg willing to pay $21 billion for a similar social media solution, WhatsApp, but not for Twitter? After all, WhatsApp is also losing money—$138 million according to our friends at The New York Times’ Deal Book.
The difference is in the number of users that the two applications have. Statista reported that WhatsApp had around 900 million active users in September 2015, while Twitter only had 316 million active users. WhatsApp has been growing fast in popularity outside the United States, while Twitter has not.
WhatsApp certainly lags beyond Facebook, which has around 1.55 billion users for its social network and 700 million users for its Facebook Messenger, but it is growing fast. This, of course, explains why Facebook is worth so much more than Twitter.
Why Facebook Makes Money and Twitter Does Not
Facebook is an integrated ecosystem similar to Alphabet Inc.’s (NASDAQ: GOOG) Google, while Twitter is simply a messaging app. Okay, to get technical, Twitter is actually a microblogging solution, but you get the picture; it basically only does one thing.
Facebook owns a number of different solutions that enables it to tap a number of different sources of revenue. That’s why Facebook reported $15.94 billion in revenue, $2.828 in net income, a 19.91% profit margin, a diluted EPS of .9879, a free cash flow of $1.412 billion, a 8.05% return on equity, $15.83 billion in cash and short-term investments and $7.355 billion in cash from operations on September 30, 2015.
The bottom line is that Facebook’s business model works, while Twitter’s does not. Companies that simply offer one social media solution, such as microblogging, cannot make money. To succeed, a social media company will need a number of sources of revenue, such as advertising and ecommerce.
Why Facebook Is a Good Investment and Twitter Is Not
Unlike Twitter, Facebook has the money to take the steps necessary to grow its business, such as acquiring WhatsApp. WhatsApp probably could not have survived as a standalone social media application, but it can thrive as part of the Facebook ecosystem.
This means that Facebook was seriously undervalued at $102.12 on December 11, 2015, a share, and its enterprise price value of $272.96 billion and market capitalization of $288.79 billion could be low. Someday the social network’s stock could rival that of Alphabet (NASDAQ: GOOGL) in value.
Twitter simply does not make money because its business model is deeply flawed. My prediction is that Twitter’s share value will one day collapse, and it could end up as a junk stock. Therefore its only potential value is as an acquisition target for somebody like Facebook, and even that is limited. There is only one social media company that is a good investment these days, and that is Facebook. Investors should stay away from Twitter because it does not make money.