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Facebook versus Twitter: How to play social media earnings

Twitter and Facebook—two of the biggest names in social media—report back-to-back earnings next week.

Twitter is scheduled for Tuesday, and Facebook rolls out on Wednesday. According to data from Kensho, a financial tool used to quantify market events, both companies have a good earnings track record—beating expectations more than 80 percent of the time. But trading action immediately after earnings is incredibly volatile.

Twitter has rallied as much as 20 percent, and tanked as much as 24 percent after a consensus-beating report.

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Facebook shares are also volatile after earnings, rising nearly 30 percent in one instance—but falling only 6 percent on its worst post-earnings-beat day.

Kensho data suggest that the growth trajectory for social media companies may be more important than quarterly income and revenue. As such, the market is more likely to reward Facebook for a better-than-expected quarterly performance than it is Twitter.

Quarterly results for Twitter have beaten consensus five out of six times since it went public in 2013. Yet investors typically sell the first chance they get, pushing shares down 4.6 percent on average.

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Lionel Bonaventure | AFP | Getty Images

Twitter notched its worst post-earnings performance after releasing its first quarterly report as a public company in February 2014. Income and revenue came in above expectations, but investors focused on weak user growth and pushed shares down nearly 25 percent the next trading day.

Facebook earnings have beaten quarterly forecasts 10 times since its 2012 IPO, while income has come up short only twice. Investors are more likely to immediately reward Facebook for beats—trading shares higher more than half the time, leading them to rally 5.7 percent on average.

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Facebook missed profit expectations in the first quarter of 2013, but beat on revenue and gained monthly users. The market took its cue from user growth and pushed shares higher by 5.6 percent the next trading day.

Another way to play social media earnings is to get in ahead of the results.

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In the two weeks leading up to a forecast-beating report, Facebook shares trade positive 80 percent of the time and return more than 7 percent on average.

No such luck for Twitter. Shares underperform the broader markets leading up to and after earnings reports—suggesting that investors may be more confident in Facebook's results than Twitter's.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.