3 Reasons Twitter Could Be Bigger Than Facebook

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Twitter announced the price range for its IPO last week. The upstart social network said shares will go on sale for $17-$20, giving the stock a valuation of up to $11.1 billion and raising as much as $1.6 billion. Don't be surprised if the stock skyrockets on opening day, or even for Twitter to up its pricing range before then. Compared to Facebook's IPO, Twitter looks like a bargain.

Facebook shares, as you may recall, fell sharply after its IPO, at one point trading for less than half of its $38 offer price, sparking a shareholder rebellion as lawsuits ensued. With its modest valuation and decision to trade the New York Stock Exchange instead of the tech-heavy Nasdaq, Twitter seems intent to avoid the debacle that befell its larger rival. And while Twitter's initial valuation of $11 billion pales in comparison to Facebook's at $104 billion, there are plenty of reasons to think that the smaller service could one day surpass the social media leader. Here are three of them.

Youth trends
Facebook's membership of over 1 billion dwarfs Twitter's at 232 million, but Twitter is making gains in at least one important area: Teens. Ironically, Facebook is losing favor with that demographic that launched the company, as it was initially a social network for only college students. According to a poll by Piper Jaffray, Twitter is now the most popular social network for teens, dethroning Facebook, which received just 23% of votes for "most important social media site," down from 42% a year ago. Twitter won 26%. Teens often cite Facebook as a "social burden," and seem to prefer replacing it with Twitter and Instagram. As social media's early adopters, teens have a lot to say about the future of the industry, the trend of them moving away from Facebook could carry over to college students and 20-somethings, who often feel similarly about Facebook being overbearing and a nuisance.

Facebook has taken the Internet by storm, tallying up over 1 billion users in less than ten years in existence, but the site ultimately seems to be a timewaster. It's the Internet equivalent of junk food. Facebook is primarily used for sharing photos, chatting with friends, and inconsequential status updates. While its popularity helps it lure in advertisers, giving them a broad market to reach, it doesn't have the same level of engagement with users that Twitter does. Twitter users often depend on it for their careers and for research, and that higher degree of utility makes it less vulnerable to competition than Facebook. While no single social network is likely to upend the current 800-pound gorilla in the social media arena in one shot, we're seeing smaller networks pick away at Facebook's supremacy such as Twitter has for news and real-time information, LinkedIn for job searching and networking, and Pinterest and Instagram for image sharing. The biggest threat to Facebook then seems to be that it's gradually reduced to the level of late-night cable TV, used purely for mindless entertainment. Twitter, meanwhile, with its focus on real-time, useful information, has a potentially wider economic moat than Facebook once it develops its ad game further. In fact, it's easy to see how the totally open and public Twitter is more of a threat to Google, the Internet's current clearinghouse for research and discovery, as it allows users to search any and all tweets, as opposed to Facebook, which restricts search to your friends and brands.

While Facebook seems to have finally figured out how to drive mobile ad revenue, deriving 41% of its total ad revenue from smartphones and tablets in its latest quarter, Twitter would seem to have the advantage here. With its 140-character limit on tweets, Twitter's format lends itself easily to small screens. It generated 70% of its ad revenue from mobile in its most recent quarter, and it expects that percentage to grow. Even more importantly, Twitter has said that its user engagement is higher on mobile devices, and that advantage should only grow as smartphones and tablets take share from desktop computing. And while Facebook may have mastered the mobile advertising business since its IPO, for Twitter, that user base is still a huge opportunity. As Andrew Foxwell, CEO of Foxwell Digital explains, "Facebook has no doubt done a better job at understanding how to get small-and-medium-sized business owners to advertise with them, even on mobile. Conversely, Twitter has not been good at scaling their ad product for small business -- or anyone, really to understand." That spells future growth.

Foolish bottom line
For Twitter, that kinetic energy, that huge potential opportunity, is what makes the company so valuable. Just it has yet to harness the full force of its advertising capabilities, so it also still has the opportunity to co-opt Facebook's strengths. In fact, it's much easier to see Twitter adopting Facebook's benefits than the other way around. Twitter could easily make its chat function more like Facebook's, or allows users to post multiple photos to their profiles. Still, the core of Twitter is in real-time, open-format information exchange based on asymmetrical relationships -- users can follow other users without being followed back. Facebook, on the other hand, is stuck with the friends format, which requires mutual relationships and reduces its relevance and utility compared to Twitter.

Of course, criticisms abound for Twitter heading into its IPO. Sequential user growth was just 6% in its last quarter, and the company is still operating at a loss, compared to Facebook, which had been profitable for three years at the time of its debut. But with more valuable user engagement, Twitter doesn't need the same user base that Facebook does, and anyway, at these prices, Twitter's per-user valuation is much lower than Facebook's, about $48 vs. $106. Once the company goes public, I'd expect Twitter to get its advertising strategy in order, the same way the demands of shareholders forced Facebook to do so once it went public.

Facebook overcame those first-year woes, and is now up nearly 40% from its IPO price, worth $127 billion. Linkedin shares also traded at a discount after an opening-day spike, but the professional social network has since soared and is now worth more than five times its offering price, at a valuation of $27 billion, with little profits to boot.

Compared to those two juggernauts, Twitter's $11 billion valuation makes it look like a steal.

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The article 3 Reasons Twitter Could Be Bigger Than Facebook originally appeared on Fool.com.

Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and LinkedIn. The Motley Fool owns shares of Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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