Have Facebook and Twitter Stocks Become Attractive?

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Bad earnings news and questions about future prospects decimated shares of Facebook Inc. (NASDAQ: FB) and Twitter Inc. (NYSE: TWTR) this week. Facebook’s stock dropped over 20% after its earnings announcement, and Twitter’s fell 21%. Most of the awful news about the two companies is probably out, which makes their stocks cheap by historical measures.

Whether the stocks are cheap depends on whether each company can get back to a strong pace of adding users. Some Facebook users were probably driven away by a scandal over how it distributed data on its users. Twitter eliminated a number of fake accounts. Those two events are behind the companies now. If there are no more “surprises,” investors can return to the core consideration of earnings and growth.

Part of any optimism about Twitter is whether its revenue can increase even with its efforts to remove some accounts. Last quarter it did. Revenue rose 24% to $711 million. The company says it has added a number of features to the service that it said will improve engagement, a critical measure for marketers.

Twitter readily admits it removed millions of accounts that it believed were fake. This caused the number of monthly active users to be flat at 335 million from the first quarter of this year to the second. If most have been weeded out, Twitter’s user base can grow again.

Facebook’s situation is more complex. It was attacked for allowing third parties access to user data. Its user growth rate has slowed considerably, along with margins. However, in the second quarter, revenue rose 42% to $13.2 billion. Net income rose 31% to $5.1 billion. Facebook can still boast a very high margin. As far as another key measure is concerned, daily active users “were 1.47 billion on average for June 2018, an increase of 11% year-over.” Facebook management continues to deal with the fallout of the data scandal, fake accounts and fake news spread across some of the platforms. And management expects a slowing of revenue growth and a drop of margins. There may not be another shoe to drop.

Facebook and Twitter each have hundreds of millions of users, with Facebook clearly in the lead. If they can continue to make money on these people, their best days may not be behind them.