(NYSE: LNKD ) and Twitter (NYSE: TWTR) shares have sold off by huge margins this year: LinkedIn shares are down 42 % year to date, while Twitter’s shares are down 37 % this year

They’re the fastest growing social networks business today. But, LinkedIn’s top-line growth is showing signs of reducing. It was up to 46 % in the very first quarter of financial 2014, from an average annual growth of 57 % in financial 2013. Assuming that the company grows at the top end of its assistance, then it’ll complete financial 2014 with a revenue of $2.08 billion, or a 36 % growth.


What’s going on at LinkedIn?
LinkedIn handled to earn a profit in 7 from the 8 last quarters in between 2012-2013, before reporting a net loss of $13.4 million in the first quarter of the current fiscal year. LinkedIn is dealing with the bugaboo of many companies experiencing high-revenue development: spiraling sales and advertising costs.

The company spent $510 million, or 34 %, of its 2013 profits, on sales and marketing expenses. In the very first quarter of financial 2014, growth in sales and advertising expenses surpassed income growth: 52 % vs. 46 %. Product development costs, the business’s second-largest expenditure classification, grew 49 % throughout the quarter, 3 portion points much faster than earnings growth. Oddly, LinkedIn’s basic and administrative expenses, its third largest classification, grew 74 %.

LinkedIn’s user base grew 36 % during the quarter compared to in 2012, however its page watches grew just 5 %, showing a rather stressing absence of user engagement.

The bright spot because rather flat report was that the company anticipates its sales and marketing expenses for the complete year as a portion of income to be below in 2013’s figure of 34 %.

Although the business’s stock-based compensation in fiscal 2014 is expected to grow to $305 million from $193.9 million in 2013, it’ll represent” simply” 14.7 % of its profits. On the other hand, Twitter’s stock-based payment of $640 -$690 million for the current year stands for about 54 % of its expected 2014 profits.

LinkedIn has even more than $2 billion in cash money and short-term securities, while Twitter is cash-flow negative.

Twitter’s Achilles’ heel
While most of LinkedIn’s troubles appear like short-term ones that the business is most likely to grow out of, Twitter’s case isn’t as simple. The bad part is that a few of Twitter’s most significant troubles aren’t necessarily of its own making, and there is not really much the company can do about them. Let us have a look at three of these reasons.

1. Poor money making rates for worldwide users
Twitter’s company displays an odd dichotomy. The company has far more worldwide users (non-U.S.) than domestic ones (U.S.): 186.8 million vs. 54.1 million. While there’s absolutely nothing unusual about this, the distressing part is that international users account for just 26 % of the company’s earnings. Non-U.S. users have been growing 1.5 times faster than U.S. users: 33 % vs. 21 %.

Twitter’s advertising profits per 1,000 timeline watches stands at $3.80 in the U.S. and simply $0.60 for the rest of the world.

Assuming that 80 % of the U.S. population will ultimately become Twitter users (a very generous presumption), and growth for both local and international sections continue at the existing rates, the U.S. market will be completely covered in just eight years, after which the rest of the business’s growth will certainly have to come from international markets. It’s most likely that U.S. growth will max out rather than the 8 years we’ve actually presumed right here, possibly in just 5 years.

With such poor monetization rates for worldwide users, the business can be facing a revenue high cliff in a very short period of time.

Twitter’s reprieve, however, could come as smartphone adoption rates in the developing economies continues to increase. Presently, a big percentage of these users are viewing Twitter through function phones, which aren’t very marketer friendly. However presuming that smartphone adoption in these nations assists to double their earnings per 1,000 timeline watches to $1.20 in about five years, it’ll certainly still be far short of the U.S. average.

2. Crowded online advertising industry
Twitter takes place to be a tiny gamer in a crowded online marketing market. The company has about 1 % market share vs. 51 % for Google (NASDAQ: GOOG ) and 11% forFacebook (NASDAQ: FB ). There are a raft of other top players in this market, too, including Yahoo, Baidu, LinkedIn, and Yelp. Facebook can sell its users’ information to marketers, LinkedIn is hectic steamrolling human-resource markets with its profiles and material, while Google is busy growing its currently dominant market share in online marketing. The space looks rather hostile for Twitter.

Twitter shares still look quite pricey even after the huge sell-off this year.


3. Stock-based compensation
Twitter’s stock-based compensation for its executives and employees is a significant drag on its bottom line. The business reported a net loss of $645.3 million in financial 2013, after taking a $600.3 million hit from stock-based settlement. The scenario isn’t anticipated to improve in financial 2014 when the business will administer stock-based settlement amounting to $640 million-$690 million.

Foolish bottom line
Twitter shares appear to be priced for a great deal of growth in the coming years. However with the business making so little money from its worldwide markets, and growth in its core U.S. market likely to strike a ceiling soon, it’s going to be hard for the company to maintain great growth five years or so down the line. LinkedIn is more probable to outgrow its issues faster than Twitter, and is for that reason the much better long-term financial investment.