Facebook (FB), Twitter (TWTR) | Why These Stocks Are A Losing Bet

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Social media stocks are a hot topic these days. Facebook is literally one of the biggest companies in the world and Twitter is constantly in the headlines, building investor sentiment and working to grow. However, I personally wouldn’t put a penny in either of these stocks. Here’s why…

Facebook Is Big! Valuations Are Bigger!

Facebook Inc (NASDAQ: FB)

First and foremost, Facebook seems like a great stock. If you look over the past five years, the stock has seen exponential growth and, just recently, the company reported that in a single day, 1 billion users logged in. However, there are a couple of things that are a huge concern for me when it comes to the stock’s ability to generate gains…

  • Market Saturation – As mentioned above, Facebook recently announced that it reached a major landmark. 1 billion people logged in, in a single day. That’s great, but where is the room for growth? The reality is that investors like to see growth and Facebook has completely saturated the market. With such saturation, it’s going to be hard for the company to continue outdoing itself and, as Apple knows thanks to iPhone sales, that can be a major hurdle to get over in the market.
  • Valuation – While Facebook has a market that is well saturated, their valuation is still up there with heavy growth stocks. Investors have been so excited about the company’s ability to grow in the past that they sent the stock climbing to what I believe is an unsustainable rate. To see this, just look at the PE ratio on Facebook’s stock. The stock is currently trading at more than 60 times last year’s earnings, more than 60 times expected earnings for this year, and more than 40 times expected earnings for next year according to NASDAQ! No matter how you slice it, that valuation is absolutely ridiculous for a company that has already saturated the market.

Twitter’s Stock Doesn’t Look Appealing Either

Twitter Inc (NYSE: TWTR)

Twitter is another social network that seems to be getting quite a bit of attention these days. However, like Facebook, I have a couple major concerns here as well…

  • Management Shake Up – First and foremost, the previous CEO of the company resigned – and for good reason. He simply couldn’t get people using the social network. Now, TWTR is in the midst of a search for a new CEO and without knowing who will run the company it’s hard for me to dump money into its stock.
  • User Data – It’s no secret that TWTR has been struggling to realize meaningful user growth. After all, that’s why the previous CEO resigned. They have tried several things and none of them seem to be working. Until user data increases, one would have to imagine that we can’t expect much growth in other areas that investors care about – revenue and earnings!
  • Talking About Earnings – Twitter produces earnings quarter after quarter. However, if you actually look into the numbers, you’ll see that the company hasn’t produced a single penny with regard to GAAP earnings in the entire life of it being publicly traded. Unfortunately for the little blue bird… that’s bad news!

Final Thoughts

It seems justified that investors are so infatuated with social media stocks. However, when you sit down and really look into the details, there are several factors that should be putting the brakes on the growth in these stocks.

What Do You Think?

Would you invest your money in TWTR or FB? Why or why not? Let us know in the comments below!

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