In the world of social media, there's Facebook (NASDAQ: FB), and there's everyone else. Facebook has four products with over 1 billion users. Other social media companies are lucky to have one. Twitter (NYSE: TWTR), which once showed promise of reaching the same level of ubiquity as Facebook, has seen its monthly active user growth stall in recent years, inching slightly higher to 336 million in the first quarter, up 3% year over year.
But Twitter has had some successes lately. It has improved engagement among its monthly users, as exemplified by its double-digit daily user growth in each of the last six quarters. Management also says its shift to video ads has resulted in better return on investment for marketers, which it expects to eventually attract back to the platform. These accomplishments have Twitter trading at a multiyear high.
Facebook is also trading near its all-time high price, which may give investors pause when choosing among their investment options in social media. Let's take a closer look at both Facebook and Twitter stock to determine which is the better buy right now.
The same underlying business
Facebook and Twitter might cater to different audiences, but they still rely on the same underlying business model. Both companies want to keep your attention for as much time as possible. Users' engagement with each company's respective app provides opportunities for Facebook and Twitter to show ads and collect data to help determine which ad will produce the greatest value in any given instance.
Facebook CEO Mark Zuckerberg has recently commented that the company doesn't want to maximize time spent, but wants to improve the quality of time spent on Facebook and its apps. Facebook has even taken steps to reduce time spent on its flagship app and Instagram. Still, the goal is to capture users' attention. Zuckerberg just noted the quality of that attention is an important factor, too.
Facebook is extremely dominant with regard to capturing its users' attention. Daily users spend an average of over 40 minutes per day on Facebook. Instagram users spend another half hour or so. U.S. users may be even more engaged, averaging 58.5 minutes per day on Facebook and 53 minutes per day on Instagram, according to data from SimilarWeb.
Meanwhile, Twitter's engagement levels are relatively tiny. Users spend an average of just 1 minute per day in the app, according to Mediakix.
Twitter engagement is improving. Daily active users are increasing significantly faster than monthly active users. That said, with such low monthly user growth at Twitter, it's not hard to outpace that growth. Last quarter, Twitter increased daily users by 10% year over year.
Facebook managed to grow daily users even faster (13%) on top of its already massive user base. So, while Twitter is improving engagement, Facebook is also seeing an influx of new users to grow the total amount of time spent on its platform.
Once users are engaged, monetize them
Keeping users engaged is only half the battle, the other half is displaying ads that produce strong returns on investment for advertisers. This is where Facebook truly shines.
Due to its strong user engagement, Facebook has millions of data points on each user about their interests. It can use those data to effectively target advertisements for businesses no matter what size. That's how it's managed to attract over 6 million active advertisers. Small businesses, in particular, are heavily reliant on Facebook advertisements to drive growth.
Twitter, on the other hand, doesn't have the same breadth or depth of user data as Facebook. As a result, it's only managed to attract a small fraction of the advertisers that are on Facebook. A majority of Twitter's ad revenue still comes from large brands, who are simply looking to reach as broad of an audience as possible and aren't as reliant on data to create highly targeted ads like on Facebook. But with a smaller audience than Facebook, brand advertisers are only giving Twitter a fraction of their business.
Most importantly, Facebook is able to produce a better return on investment for advertisers both big and small. Twitter has recently boasted about the improvement to its advertisements' returns. But Facebook CFO Dave Wehner rightfully pointed out that marketers will compare ROI across platforms, not the same platform this quarter to last quarter. With Facebook dominating return on investment among social media apps, it's in the best position to win the vast majority of ad budgets.
A look at some numbers
Qualitatively, Facebook is hands-down a better company than Twitter, with strong user growth, excellent user engagement, and ad products that convert better for marketers. Let's look at how the two compare on valuation.
The only area where Twitter has a better valuation than Facebook is in its price-to-sales ratio. Even then, the margin between the two is slim, and there's a clear reason why Facebook ought to have a higher P/S ratio than Twitter. Facebook's profit margins are absolutely massive, with an operating margin of 46% in the first quarter this year. In comparison, Twitter posted an operating margin of just 11%. That discrepancy shows up in the two companies' EV/EBITDA valuations.
The story is also clear when looking at the amount investors value the free cash flow generated by both companies. Facebook's valuation is far lower than Twitter's. That's despite the fact that Facebook is showing improvements in its free cash flow while Twitter's growth is relatively slow. Facebook's free cash flow improved 33% in the first quarter; Twitter's improved 7%.
With better business operations and a better valuation, Facebook is a clear better buy for investors.
10 stocks we like better than FacebookWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Facebook wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of June 4, 2018