After reporting third quarter earnings this week, Facebook shares are down approximately 8%, while Twitter shares declined roughly double that amount. What's more, year-to-date, shares in each company have moved in completely opposite directions as Facebook gained nearly 36% compared to Twitter's 36% drop over the past 10 months. Yet, despite this trading action, shares in both companies are up significantly from their IPO prices of $38 and $26, respectively.
However, the reasons for each company's decline this week following earnings are further evidence of the two company's divergence from each other. For example, Facebook warned of higher costs and slower revenue growth as the company seeks to integrate its recent purchases of WhatsApp and Oculus, among others.
While Facebook's recent decline is significant, it is not entirely unexpected given the stock's performance year-to-date. It seems as though investors and analysts alike have faith in the company's growth strategy despite its expensive acquisitions. The success Facebook has had with its 2012 Instagram purchase is one possible reason analysts are giving Chairman and CEO Mark Zuckerberg the benefit of the doubt.
On Facebook's conference call this week, Zuckerberg highlighted Instagram's "strong international growth, which in some countries has achieved more than 100% year-over-year growth." He added that people who use Instagram spend around 21 minutes each day on average using the app, which is a "strong figure compared to the industry and a good sign that the company's Instagram strategy is on the right path."
Meanwhile, Twitter reported that user growth slowed in the third quarter. Although average Monthly Active Users (MAU) grew 23% year-over-year, this figure only grew 4.8% sequentially from the second quarter. Another metric -- timeline views -- showed the same pattern as this figure grew 14% year-over-year, but at the same 4.8% rate as MAUs from the previous quarter.
However, Twitter has shown some signs of improvement with regards to ad spending and profitability. For example, ad revenue per thousand timeline views grew double-digits for the second straight quarter and was up 83% year-over-year to $1.77. Separately, a measure of core profitability -- as measured by adjusted EBITDA margin -- improved for the third straight quarter, growing from 15% in first quarter to 19% in the most recent quarter.
Ultimately, the biggest difference between Facebook and Twitter is that Facebook continues to demonstrate that it is more than just a fad and is here to stay for the longer-term. Facebook has continually shown the willingness to take risks and spend money to grow and realize its vision financially, technologically and socially.
Twitter, on the other hand, continues to struggle and has not yet found its true place in the current digital and social media age. While the company has a solid base, Twitter cannot seem to significantly grow this base, while customer engagement remains limited.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates FACEBOOK INC as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate FACEBOOK INC (FB) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and impressive record of earnings per share growth. However, as a counter to these strengths, we find that the stock itself is trading at a premium valuation."
You can view the full analysis from the report here: FB Ratings Report