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Better Buy: Facebook, Inc. vs. Line Corp

Leo Sun, The Motley Fool

2018 was a dismal year for many social media companies. Facebook (NASDAQ: FB), the world's biggest social network, was plagued by major privacy and security issues. Smaller regional players like Line (NYSE: LN) also struggled to grow their user bases and keep their expenses under control.

That's why shares of Facebook and Line tumbled 26% and 17%, respectively, in 2018. Let's take a closer look at both companies to see if they'll fare better in 2019.

A woman uses a social media app on her phone.

Image source: Getty Images.

Comparing their core businesses

Facebook's monthly active users (MAUs) rose 10% annually to 2.27 billion last quarter, while its daily active users (DAUs) grew 9% to 1.49 billion. Facebook's DAU growth in the US and Canada stayed flat annually at 185 million, and rose just 1% to 278 million in Europe. Those anemic growth rates, which were likely caused by its ongoing privacy problems, were offset by its growth in Asia and the rest of the world.

However, Facebook generates significantly lower revenue per user in Asia and the Rest of the World than the US, Canada, and Europe. This means that Facebook needs to rely more on higher-growth (but less profitable) markets to offset the stagnant growth in its developed markets.

Facebook generated 99% of its revenue from ad sales during the first nine months of fiscal 2018. Most of that revenue comes from its core social network, but it's also gradually monetizing Instagram and WhatsApp, which have over 1 billion and 1.5 billion MAUs, respectively.

Line only discloses its MAUs from its four key markets -- Japan, Taiwan, Thailand, and Indonesia -- which fell 2% annually to 165 million last quarter. It gained users in Japan, Taiwan, and Thailand, but that growth was offset by a loss of 13 million users in Indonesia, which coincided with Facebook's expansion into the market. However, its total DAUs still rose 2% to 127 million.

Much of that DAU growth was driven by Line's ecosystem of services, which bundle a Facebook-like news feed, stickers, games, streaming music, comics, e-commerce, mobile payments, and other services into Line's core messaging app.

A Line Friends store in Japan.

A Line Friends store in Japan. Image source: Line.

As a result, ad revenue only accounted for 52% of Line's top line during the first nine months of 2018. 35% came from its Communication, Content, and Others unit, which provides digital media content like comics, music, and videos to users. The remaining 13% came from its Strategic Businesses, which include its Line Friends brick-and-mortar stores, Line Pay payments platform, and other businesses.

Which company is growing faster?

Facebook's revenue rose 41% annually to $38.9 billion during the first nine months of 2018. Its operating income grew 33% to $17.1 billion, and its net income climbed 31% to $15.2 billion.

Those growth rates look solid, but Facebook's growth decelerated significantly in recent quarters, with its 33% sales growth in the third quarter marking its slowest growth rate since its IPO. Analysts expect Facebook's revenue to rise 24% next year, but for its earnings to grow just 1% as it faces tougher growth in its most profitable markets. Concerns about future privacy problems are also casting a long shadow over its future.

Line's revenue rose 25% annually to 151.21 billion yen ($1.4 billion) during the first nine months of 2018 as its growth in Advertising and Strategic Business revenues offset a slight dip in its Communication, Content, and Others revenue.

However, Line's operating income plunged 72% to 6.75 billion yen ($62 million), and it reported a net loss of 7.69 billion yen ($71 million) -- compared to a profit of 12.2 billion yen ($110 million) a year earlier. Those massive declines were caused by the expansion of Line's ecosystem, which caused its operating expenses to spike 44%.

Analysts expect Line's revenue to rise 14% next year, but for its bottom line to remain in the red. This puts Line in a very precarious position, since Facebook will likely ramp up its efforts to capture users in Line's four core markets to boost its Asia-Pacific revenue.

The winner: Facebook

Facebook faces a lot of near-term challenges, but it's still the 800-pound gorilla of the social networking market and has plenty of ways to expand its reach with Instagram and WhatsApp. The company should remain profitable for the foreseeable future, and it trades at a reasonable 19 times forward earnings.

Meanwhile, Line will keep pouring cash into the expansion of an ecosystem which may (or may not) squeeze out some more revenue per user as its MAU growth stalls out. Neither Facebook nor Line looks particularly attractive yet, but I'd definitely pick the former over the latter as a long-term play on the social networking market.

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Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.