The Street mostly seems to be in agreement about Apple‘s (NASDAQ:AAPL) fiscal third-quarter results: They were solid all around. Thanks to strong performance in every geographic segment and big lifts from iPhone, services, and the Other Products segment, revenue increased 17% year over year while earnings per share soared 40%.
Tech investing isn’t for the faint of heart, but the gains can be life-changing if you buy the right companies and hold onto them for the long term.
Day one as a publicly traded company started off with a bang for Canadian marijuana grower Tilray (UNKNOWN:UNKNOWN). And day two continued the momentum.
There’s a bigger buzz about the marijuana industry than ever before. Thanks to a recent vote in Oklahoma, 30 states now have laws in place that broadly allow the legal use of medical marijuana. Nine states plus the District of Columbia have legalized recreational marijuana, with Michigan potentially joining their ranks pending a vote on the issue in November.
Even though the tag line for its namesake theme park is “The Happiest Place on Earth,” investors in The Walt Disney Company (NYSE:DIS) haven’t had much to be happy about. While the broader market has gained 30% over the past three years, Disney stock has languished, falling 9% over the same period.
In the world of social media, there’s Facebook (NASDAQ:FB), and there’s everyone else. Facebook has four products with over 1 billion users. Other social media companies are lucky to have one. Twitter (NYSE:TWTR), which once showed promise of reaching the same level of ubiquity as Facebook, has seen its monthly active user growth stall in recent years, inching slightly higher to 336 million in the first quarter, up 3% year over year.
But Twitter has had some successes lately. It has improved engagement among its monthly users, as exemplified by its double-digit daily user growth in each of the last six quarters. Management also says its shift to video ads has resulted in better return on investment for marketers, which it expects to eventually attract back to the platform. These accomplishments have Twitter trading at a multiyear high.
Facebook is also trading near its all-time high price, which may give investors pause when choosing among their investment options in social media. Let’s take a closer look at both Facebook and Twitter stock to determine which is the better buy right now.
The same underlying business
Facebook and Twitter might cater to different audiences, but they still rely on the same underlying business model. Both companies want to keep your attention for as much time as possible. Users’ engagement with each company’s respective app provides opportunities for Facebook and Twitter to show ads and collect data to help determine which ad will produce the greatest value in any given instance.
Facebook CEO Mark Zuckerberg has recently commented that the company doesn’t want to maximize time spent, but wants to improve the quality of time spent on Facebook and its apps. Facebook has even taken steps to reduce time spent on its flagship app and Instagram. Still, the goal is to capture users’ attention. Zuckerberg just noted the quality of that attention is an important factor, too.
Facebook is extremely dominant with regard to capturing its users’ attention. Daily users spend an average of over 40 minutes per day on Facebook. Instagram users spend another half hour or so. U.S. users may be even more engaged, averaging 58.5 minutes per day on Facebook and 53 minutes per day on Instagram, according to data from SimilarWeb.
Meanwhile, Twitter’s engagement levels are relatively tiny. Users spend an average of just 1 minute per day in the app, according to Mediakix.
Twitter engagement is improving. Daily active users are increasing significantly faster than monthly active users. That said, with such low monthly user growth at Twitter, it’s not hard to outpace that growth. Last quarter, Twitter increased daily users by 10% year over year.
Facebook managed to grow daily users even faster (13%) on top of its already massive user base. So, while Twitter is improving engagement, Facebook is also seeing an influx of new users to grow the total amount of time spent on its platform.
Once users are engaged, monetize them
Keeping users engaged is only half the battle, the other half is displaying ads that produce strong returns on investment for advertisers. This is where Facebook truly shines.
Due to its strong user engagement, Facebook has millions of data points on each user about their interests. It can use those data to effectively target advertisements for businesses no matter what size. That’s how it’s managed to attract over 6 million active advertisers. Small businesses, in particular, are heavily reliant on Facebook advertisements to drive growth.
Twitter, on the other hand, doesn’t have the same breadth or depth of user data as Facebook. As a result, it’s only managed to attract a small fraction of the advertisers that are on Facebook. A majority of Twitter’s ad revenue still comes from large brands, who are simply looking to reach as broad of an audience as possible and aren’t as reliant on data to create highly targeted ads like on Facebook. But with a smaller audience than Facebook, brand advertisers are only giving Twitter a fraction of their business.
Most importantly, Facebook is able to produce a better return on investment for advertisers both big and small. Twitter has recently boasted about the improvement to its advertisements’ returns. But Facebook CFO Dave Wehner rightfully pointed out that marketers will compare ROI across platforms, not the same platform this quarter to last quarter. With Facebook dominating return on investment among social media apps, it’s in the best position to win the vast majority of ad budgets.
A look at some numbers
Qualitatively, Facebook is hands-down a better company than Twitter, with strong user growth, excellent user engagement, and ad products that convert better for marketers. Let’s look at how the two compare on valuation.
|Enterprise value-to-EBITDA ratio||19.93||57.28|
The only area where Twitter has a better valuation than Facebook is in its price-to-sales ratio. Even then, the margin between the two is slim, and there’s a clear reason why Facebook ought to have a higher P/S ratio than Twitter. Facebook’s profit margins are absolutely massive, with an operating margin of 46% in the first quarter this year. In comparison, Twitter posted an operating margin of just 11%. That discrepancy shows up in the two companies’ EV/EBITDA valuations.
The story is also clear when looking at the amount investors value the free cash flow generated by both companies. Facebook’s valuation is far lower than Twitter’s. That’s despite the fact that Facebook is showing improvements in its free cash flow while Twitter’s growth is relatively slow. Facebook’s free cash flow improved 33% in the first quarter; Twitter’s improved 7%.
With better business operations and a better valuation, Facebook is a clear better buy for investors.
I’ve written before that dividend investing isn’t all about yield. In fact, when dividends seem too good to be true, that’s often the case, a concept known as a dividend yield trap.
With that in mind, here are two potential yield traps that I’d suggest investors stay away from, at least until these companies figure out how to sustainably increase revenue and profitability.
|Company||Recent Share Price||Dividend Yield|
|CBL & Associates(NYSE:CBL)||$5.79||13.5%|
|Barnes & Noble(NYSE:BKS)||$6.25||9.9%|
The wrong kind of malls to own in the new retail environment
CBL & Associates is a real estate investment trust, or REIT, that owns shopping malls in midsize markets. And at first glance, its 13.5% dividend may appear to be sustainable. After all, the $0.80 annual payout is well-covered by the company’s projected funds from operations of $1.75 per share in 2018 and $1.70 per share in 2019. However, it’s beyond that time that has me worried.
Over 60% of CBL & Associates’ properties are anchored by either a Sears or a JCPenney, but their chains are closing stores at a rapid pace and are struggling to survive. And unlike Class A mall operators like Simon Property Group, it isn’t practical for CBL to redevelop those spaces into value-adding destinations.
CBL’s malls are of the Class B and C varieties. If you’re not familiar with real estate property classifications, Class B properties generally have some deferred maintenance issues and/or have lower-income tenants, while Class C properties are typically located in less-desirable locations, are over 20 years old, and are in need of considerable renovation or repositioning.
In a nutshell, CBL’s properties aren’t the best malls, nor is the company in a financial position to turn them into the best malls. While it’s possible that the company’s repositioning efforts may work, the future of this class of brick-and-mortar retail is far too uncertain.
This company doesn’t have a realistic path to raising revenue
To be clear, I love going to physical bookstores, especially Barnes & Noble. However, I wouldn’t invest in the company in the current retail environment.
Barnes & Noble has two retail trends working against it. First, I know it’s not exactly news, but the world is constantly becoming more digital, and this is especially true in books, music, and movies — Barnes & Noble’s core product types.
Second, Amazon.com is eroding the e-commerce market share of the company (remember, Amazon began its life as a bookstore). While Amazon’s sales have soared, as my colleague Joe Tenebruso wrote earlier in 2018, Barnes & Noble’s online sales fell by 4.5% during the crucial holiday season. In the e-book category, Amazon’s Kindle e-reader continues to dominate while Barnes & Noble’s Nook is an also-ran.
So, not only does Barnes & Noble sell products with declining sales, but it also faces tremendous and possibly insurmountable competition in the one area of retail that’s actually working.
From a numbers standpoint, things look pretty scary. Barnes & Noble pays an annual dividend of $0.60; based on analyst estimates, this translates to payout ratios of 102% and 95% in the next two fiscal years. To be fair, earnings per share can sometimes be misleading, but Barnes & Noble’s cash flow hasn’t been sufficient to cover the current dividend rate since 2014. Considering that the company has had six straight years of declining revenue, I wouldn’t bet on these metrics to get much better anytime soon.
Planet Fitness (NYSE:PLNT) hit new all-time highs last week, and at least one Wall Street pro sees the fast-growing gym operator moving even higher. Berenberg is initiating coverage of Planet Fitness with a buy rating and a $53 price target.
Dollars today are worth a whole lot more than dollars you might receive a few years from now, so when a relatively conservative market research provider pins an 11-digit net present value to a drug still in development, it pays to understand why.
This year has been a pretty good one for energy stocks. Thanks to improving oil prices, the average energy stock as measured by the Vanguard Energy ETF (NYSEMKT: VDE) — which holds more than 140 energy stocks — is up about 6% for the year, outpacing the 4% gain for the S&P 500.