The Darlings & Devils Of The Tech Sector

The popularity of social media sites is but one component of their investment allure. There is no doubt that both Facebook (FB) and Twitter (TWTR) have a massive user base, but the fundamental underlying problems at one of these tech giants has depressed share prices and lowered investor expectations.

Of course, I’m referring to Twitter – the social media giant that went public in November 2013. On opening day the share price burst out of the gates hitting $45.10 owing to strong investor demand. That quickly faded, and now nearly 2 years later the stock is trading at $29.49 a share.

At current prices the company's market capitalization is $19.82 billion with earnings per share of – $0.98, and no price-earnings ratio to speak of. The one-year target estimate is a little $40.94.

So what is wrong with Twitter?

• For one thing, the slow user growth at the company is really dragging the stock down. Fortunately, the top brass at Twitter is looking to restructure the company's product offerings to ramp up its user base. It should be remembered that there is a leadership vacuum at Twitter, and things like that have a negative effect on stock valuations. Twitter appears to be stagnating and investors tend to shy away from stagnating stocks.
• Twitter is growing but at a rate of just 3%. Current user stats suggest that Twitter has 316 million users, but the stock has declined almost 40% since April. One of the 4 founders of Twitter – Jack Dorsey – has now stepped into the CEO position, while the company continues its restructuring efforts. The acting CEO of Twitter dropped a bombshell when he admitted that Twitter was simply too hard to use.
• The real issue with Twitter however is the inability of the company's management to communicate the long-term strategy to investors. The previous CEO – Mr Costolo was particularly inept in that department. Until a new CEO is assigned, Twitter will remain undervalued and the proverbial black sheep of the tech world.

Facebook on the other hand remains the darling of the tech world for these reasons:

• When Facebook released its quarterly earnings, the stock was up 24%. While it has retreated somewhat since then – owing to increased expenses during Q2 – it still remains a viable investment opportunity.
• Facebook remains highly profitable; however profitability decreased to 31% from 48% year-on-year. Revenues came in at $4.04 billion, but net income dropped to $719 million – another decrease year-on-year. On a positive note, Facebook will be monetizing WhatsApp and Instagram.
• Another major money-spinner for Facebook is its purchase of Oculus for $2 billion. This virtual reality initiative is, according to Zuckerberg, the way of the future.

In my opinion, Twitter certainly has strong upward potential but Facebook remains the safe investment over the long term.