Commentary

Investors Turn on Facebook, Twitter

Rising costs and ambitious long-term investment strategies are undermining investor confidence in Facebook and Twitter, judging by the downward movement in both companies’ stock following their earnings announcements earlier this week. Twitter is also suffering from its difficulty monetizing users and a slowdown in new user growth.

This morning Facebook’s stock price was trading as $73.15, down 9.4% from $80.76 on Tuesday. On Tuesday Facebook announced a profit of $802 million on revenues of $3.2 billion in the third quarter, including $2.96 billion in advertising. Profit was up 89% from $425 million in the third quarter of 2013, while revenues increased 48% from $2.02 billion.

However investors were apparently put off by the social media titan’s plans to spend a lot of money on new products and initiatives in areas ranging from artificial intelligence to the company’s ambitious plan to expand Internet access in the developing world, detailed by founder Mark Zuckerberg in the earnings call.

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Needless to say, all these projects basically have one long-term goal -- increasing the numbers of Facebook users and their engagement with the platform -- which at first blush you might think investors would applaud. However there is real cause for concern, as Facebook’s strategy seems to depend less on organic growth and more on expensive acquisitions like Whatsapp, for which the company splashed out a cool $22 billion earlier this year (and which then posted a $232 million loss).

Meanwhile Twitter’s stock was trading at $41.05 this morning, down 15.4% from $48.55 on Monday. The company said revenues more than doubled from $169 million in the third quarter of 2013 to $361 million this year, as advertising revenue soared 109% to $320 million over the same period. But the company also posted a loss of $175.5 million, reflecting increased costs including research and development, sales and marketing, and administrative expenses.

Compared to the third quarter of 2013, Twitter’s monthly active users were up 23% to 284 million. However more recent quarter-to-quarter comparisons suggest organic growth is slowing, as Twitter added 13 million monthly active users compared to the second quarter of 2014, disappointing analysts who expected somewhere from 14-17 million.

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