Facebook & Twitter – Black and white

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Facebook and Twitter going in opposite directions. 

• Facebook and Twitter report very different results, highlighting the gulf between the haves and the have-nots in the digital ecosystem.

Facebook Q2 16A

• Facebook reported very strong results as it continued to improve the degree to which it is able to monetise its users on mobile devices.
• Q2 16A revenues / adj-EPS were $6.44bn / $0.97 well ahead of consensus at $6.01bn / $0.82.
• Steady progress was made during Q2 16A with total MaUs reaching 1.71bn of which 1.57bn access Facebook via a mobile device.
• Messenger and WhatsApp are now comfortably past 1bn MaUs, with Instagram passing 500m during Q2 16A.
• Mobile now makes up 84% of total advertising revenues and user engagement with Facebook’s services continues to progress.
• Facebook Live is also seeing traction and has been used several times to broadcast important current affairs.
• This is very bad news for Twitter, which jumped onto the live video broadcast bandwagon first with Periscope, but is now at risk of becoming irrelevant.
• The outlook for Facebook remains strong but I am increasingly concerned that expectations have more than caught up with the shares.
• The fact that the shares rallied just 5% in after-hours trading is warning enough, but RFM’s monetisation model also indicates that growth may slow significantly in H2 2016E.
• This is because Facebook still only occupies 35% of the Digital Life pie and without greater coverage, the monetisation opportunity is limited.
• Facebook is working on this but I have long been of the opinion that its new strategies will not become revenue generating in time to meet consensus expectations.
• Although I see Facebook as potentially becoming the biggest ecosystem of them all, I think that there will be a much better time to get involved in the stock.
• I am holding off till then.

Twitter Q2 16A

• Twitter reported another dismal set of results as it guided Q3 16E revenues well below expectations.
• Q2 16A revenues / adj-EPS were $602m / $0.13 compared to expectations of $607m / $0.09 but guidance fell far short.
• Q3 16E revenues are expected to be $590-$610m ($600m midpoint) way below consensus at $681m but broadly in line with RFM at $607m.
• RFM’s estimate is based on its monetisation model for digital ecosystems which estimates revenues based on Digital Life coverage, MaUs and performance against the 7 Laws of Robotics.
• Although users did expand to 313m during Q2 16A, Twitter’s fundamental problem remains the fact that it only covers 16% of the Digital Life pie explaining its lack of growth.
• This is why its deal with the NFL is so important.
• If Twitter can generate traction upon its platform from the 8 or so games it will be broadcasting in H2 2016, then it stands a chance to resist being swamped by Facebook Live Video.
• Assuming this is successful and Twitter can build upon this foundation, then Twitter could have a media consumption offering which would increase its coverage to 26%.
• This would then give it scope to entice users to spend more time on its platform and thereby start growing revenues once again.
• However, this is very far from reality and I still have concerns that a part time CEO is exactly what Twitter does not need at the moment.
• Hence, I can see Twitter becoming an acquisition target but with no growth now becoming the clear reality, interest is likely to start once the shares trade below $10.
• I am still very cautious on Twitter.