MKM Partners: Sell Twitter To Buy Facebook?

In separate reports published Tuesday, MKM Partners analyst Rob Sanderson reiterated a Buy rating on shares of Facebook Inc FB with a price target boosted to $120 from a previous $105. Concurrently, shares of Twitter Inc TWTR were reiterated with a Neutral rating but with a price target slashed to $31 from a previous $39.

Facebook: Still Relevant

According to Sanderson, Facebook showed "few surprises" in its most recent quarterly results while still showing "solid" monetization gains.

Sanderson added that Facebook's user growth "continues to impress" given its already massive reach. In fact, the analyst suggested "there is still room" to grow as less than half of the world's 3.2 billion Internet users are on the social network.

Sanderson also pointed out that "more impressive" is the fact that 968 million users are on Facebook daily. The analyst continued that the proportion of daily active users to monthly active users rose year-over-year to 65 percent as Facebook's mobile app placed the platform "central" in people's daily lives.

Looking forward, Sanderson noted that while Instagram remains a source of investor concern, the platform could contribute "significant" revenue given an estimated 350 million active users that have engagement rates that may be higher than Facebook's core platform. Meanwhile, Instagram continues to build its advertising tools and recently opened its new ad API to an expanded group of Facebook marketing partners which will increase the number of ads available to display.

Finally, Sanderson suggested that Instagram is expected to demonstrate a "measured" advertising ramp where demand will outstrip supply for the foreseeable future.

Twitter: Execution Challenges

Sanderson stated that Twitter's management team is addressing the right areas in fixing what needs to be fixed, specifically: "the mass market does not know why it needs Twitter and those that try, often find a cumbersome experience and leave."

Sanderson said Twitter's "Project Lightning" service "breaks away" from its traditional timeline and showcases events. As such, the company could improve its platform with photos and video, while allowing users to watch how an event unfolds.

With that said, Sanderson also noted that Twitter's near-term profit and user growth is a question mark as improvements to the user-experience "are yet to be seen." In fact, the company is operating in a "fast-moving space" while the stock's valuation discounts significant growth.

Sanderson also pointed out that many celebrities have "many more" Instagram followers than Twitter followers while Snapchat's Live Stories is drawing an increasingly larger audience.

Bottom line, Twitter's "influencers" are likely to move to a "more vibrant" platform if negative engagement trends at Twitter fail to reverse. Ultimately, the analyst suggested "this could ultimately collapse the network."