Menlo Park, Calif.-based Facebook Inc. (Nasdaq:FB) and Twitter Inc. (NYSE:TWTR) are considered by some to be the perfect social media match. Their services and revenue streams are complementary so a linkup could be the solution to some of their challenges, notably, Twitter's slowing traffic growth and share price and Facebook's fading hipness and difficulty in rolling out new, traffic-generating services.

While Twitter has plenty going for it, its 255 million monthly active users pale in comparison to Facebook's 1 billion. Though Twitter posted a 25% growth rate in users in the most recent quarter, investors were disappointed that the figure was below the 30% gain seen in the fourth quarter. The San Francisco-based company’s fading user growth was amid a large number of “tweetable” events in the quarter such as The Oscars, the Olympics and The Super Bowl, making the lower-than-expected numbers even more worrying. Once growth starts to slow in high-flying companies – even by a little bit – it’s hard to speed it back up. Twitter's shares were hammered as a result of the disappointing results, plunging more than 40% this year.

Unless Twitter CEO Dick Costolo has some secret monetization trick hidden up his sleeve, his options are limited. As recently as December, Twitter's shares traded at the $75 level. They've since dropped to below $40, but with a forward price-to-earnings multiple of over 700 (it has yet to post a profit), the shares still aren’t cheap. Facebook CEO Mark Zuckerberg could decide to gamble on Twitter anyway. After all, he recently paid $19 billion for WhatsApp, a popular but thus far unprofitable messaging service. Twitter's market capitalization of $22.5 billion amounts to pocket change for a company such as Facebook.

A Happy Coupling?

Facebook generated $2.27 billion in advertising revenue in the first quarter, a rise of 82% from the same period last year. Twitter’s $250.5 million in revenue in the first quarter pales in comparison but represents a gain of more than 125% from last year. That growth rate can be attributed to its strength in fast-growing mobile advertising. Some 80% of Twitter's ad revenue comes from display, search and messaging on mobile devices. Facebook will continue to dwarf Twitter in ad revenue, but Twitter's numbers will be nothing to sneeze at. Twitter’s mobile ad revenue should hit $450 million in 2014, Facebook is expected to generate $1.5 billion and Google Inc. (Nasdaq:GOOG) should top both with $6.3 billion.

Ad numbers aside, both Facebook and Twitter have spend gobs of time and money on trying to emulate one another. Twitter is trying to expand beyond 140-character messages into services such as Facebook’s Instagram or Snapchat, which have gained in popularity. Earlier this year, Twitter introduced Vine, which lets users share brief videos. Vine’s popularity has surged even as Facebook’s Instagram introduced a rival video-sharing feature. Facebook has plenty of challenges as well. The pricey and elusive quarry that is the new killer, traffic-generating app has at times eluded the company. Some of its high profile new features such as Graph Search, a semantic search engine, and the Android Cover Feed, which allowed users to browse their news feed via their lock screen, flopped.

Need more reasons for a hookup between the companies? Twitter feeds could provide Facebook users with a robust platform for keeping abreast of breaking news. Facebook could make Twitter more user-friendly.

For all its faults, Facebook is relatively simple to use for even the least tech-savvy users. The same can’t be said for Twitter. Many people find the whole process of “tweets” and “retweets” confusing. Of course, that’s not the case for everyone; millions of people post on information on their Twitter and Facebook accounts simultaneously, which is yet another reason why the companies should merge.

The Bottom Line

Slowing traffic growth could mean that Twitter will have difficulty in meeting Wall Street’s ever-increasing expectations. The company's shares are already sagging, putting them in acquisition range. Facebook, with its deep pockets and complementary business, could make an especially attractive candidate even considering Twitter's astronomic multiple.

Related Articles
  1. Stock Analysis

    What Makes LinkedIn Different From Facebook and Twitter

    Even with its network of 250 million members, Mountain View, Calif.-based LinkedIn Corp. is often overlooked when it comes to social-media companies.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  4. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  5. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  6. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  7. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  8. Stock Analysis

    The Safest Stocks You Can Invest in Right Now

    These stocks are likely to hold up better than others in a bear market, but there's a twist.
  9. Investing Basics

    5 Reasons to Expect Lower Stock Returns

    Lower stock returns are likely here to stay for some time. Here are five reasons why.
  10. Investing Basics

    What to Cut From Your Portfolio Right Now

    Owning stocks may shortly become too scary for your portfolio. Here's why, and here are some alternatives.
  1. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  2. Social Networking Service (SNS)

    SNS stands for “social networking sites.” SNS users create a ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!