Twitter (NYSE: TWTR) has recently become much more than the 140-character social messaging platform. Last year acquired video platform Periscope is now the main source of attention. Twitter’s deal with the NFL to live stream Thursday Night Games through the Periscope app underlines the companies ambition. But Twitter isn’t the only one aggressively moving in the area of live streaming video. Facebook (NASDAQ: FB) wants to grab this market as well. Founder and CEO Mark Zuckerberg thinks “we’re entering a new golden age of video” and in February Facebook decided to put a lot of additional efforts in Facebook Live to make it a huge success. The big question: how can social media platforms monetize live video and gives it investors a reason to add exposure in Twitter and/or Facebook?
Live video costs money
Twitter’s Periscope deal with NFL is by industry watchers seen as huge. Not just since the deal enables mobile audiences to watch NFL anywhere, but the deal also may attract (male) millennials. This group is hard to target and the online chatter during primetime may be very attractive for Twitter’s advertisers. However, for now the deal comes with a big price tag: $10 million for the package, or $ 1 million per unexclusively broadcasted game. Although NFL said that Twitter wasn’t the highest bidder, Facebook is rumored to have backed out due to the price tag. One the other hand, NFL preferred Twitter as result of its size and scale, where there are doubts that Facebook is able to convert enough viewers.
NFL broadcasts are high-profile events that may well boost traffic among potentially interesting target groups. Missing this major deal urges Facebook to look for other opportunities. Since celebrities draw a lot of attention and have many followers, it’s an obvious choice to support their live videos. But for now, Facebook has to pay financial incentives to popstars and other celebs. As a result, monetization may be very limited currently.
Winner takes all?
Why are both social platforms so eager to attract users? Obviously it is important to reach a certain size and scaling, in particular in those demographic groups that are otherwise hard to reach. Succeeding in this goal may lure advertisers and makes monetization much easier. But there’s an additional reason to be aggressive in this stage. There seems little room for multiple live video platforms. Live streaming app Meerkat seems to have lost to Periscope already, and the popularity of YouTube compared to other video applications seem to indicate that live video streaming will be a winner-takes-all market too. By the way, YouTube parent Alphabet is working on a Live Video app ass well, though previous endeavors with Google Messenger etc. seem to indicate that Google being late in the game may be less of a concern for those ahead in the game.
Shareholders have to choose
Currently there’s a lot of uncertainty if, when and to what extend Periscope and Facebook Live can monetize their user base. Periscope now has over 200m users, with Twitter having 320m monthly active users. But the potential for Facebook is certainly there. The social media platform has 1.6 billion users and with its Messenger surpassing 800m users recently, Facebook is keen to monetize this huge potential pool of revenues. Investors’ pressure is in particular on Twitter, since the company is still reporting negative bottom lines. Analysts’ consensus is that 2018 will likely be the first year of profits. On the other hand, Facebook is already profitable with a projected EPS-growth of 66% in 2016 and 49% in 2017.
Also projected revenue growth is stronger at Facebook. For the years 2016-2020, analysts expect an average YoY-growth of 28%, while Twitter is behind with 23%. Nevertheless, investors are paying a significant premium for Facebook. Price-to-Sales currently stands at a very lofty 12.8, only dropping to 5.4 by 2020. Twitter is already cheaper, with a p/s-ratio of 4.0,
dropping to only 1.9 in 2020. Yet, Facebook shows a superior performance. During the last 12 months, shares rose with 38%, compared to a drop of nearly 68% for Twitter shares. For 2016, Facebook is up 8.6%, while Twitter lost 26.6%. But there are green shoots: since reaching a bottom in the second week of February, shares are up by 17.9%, outperforming Facebook that rose 14.2%.
As mentioned in our previous article, we favor Twitter over Facebook. The recent developments in live streaming video only support that view. Facebook’s valuations have priced in a lot of potential, something that is certainly not the case for Twitter. There’s a decent risk that shares of Facebook will develop much more modestly in the next periods. True, Twitter is a highly volatile stock. But with the low in February, there’s an obvious stop-loss level. If investors want to play the potential of live video, monetization or not, Twitter is the right play.
Data as of April 8 closing.