Social media stocks are back in favor: they've held up fairly well despite the broader market downturn seen since the start of August. Especially for Facebook, Inc. FB and Snap Inc SNAP, it has been a redemption of sorts.
Source: Y Charts
The following is an analysis of the three stocks from an investment perspective.
Facebook Spending To Correct Privacy Issues
Facebook has four major products: Facebook; the photo app Instagram, which it bought in 2012 for $1 billion; the messaging applications Messenger and WhatsApp; and Oculus, which makes virtual reality products.
Almost all of its revenue comes from selling ads. Facebook has invested in longer-term initiatives such as connectivity efforts, AI and augmented reality.
Mobile ad revenue has climbed in recent years. In the recent second quarter, mobile ad revenue came in at $15.6 billion, accounting for 94% of the total.
Much of the weakness in Facebook shares in 2018 stemmed from scandals that rocked the company, including the data scandal involving the company and British political consulting firm Cambridge Analytica. Raw data from about 87 million Facebook profiles was compromised.
Privacy issues continue to haunt the company. An FTC investigation into lapses on this front led to the company recently reaching a settlement with the agency, paying a $5-billion fine and agreeing to sweeping new restrictions on user privacy decisions.
Facebook CEO Mark Zuckerberg said on the second-quarter earnings call that the company's priority is to tackle major social issues confronting the internet, including privacy, elections, harmful content and data portability.
CFO David Wehner cautioned of a deceleration in sequential revenue growth going forward, with a pronounced deceleration expected in the fourth quarter of 2019 and into 2020, partly due to ad-targeting related headwinds and uncertainties.
The ad-targeting headwinds include regulatory developments such as the GDPR in Europe, platform changes Facebook is enacting to ensure privacy and product changes aimed at addressing privacy concerns.
Facebook has also ventured into the blockchain realm by announcing its own cryptocurrency, Libra, which is intended to facilitate easy transfer of money via WhatsApp. Libra is set to launch in 2020.
Notwithstanding the reassurances and initiatives, privacy issues continue to haunt the company. As recently as this month, a Bloomberg report revealed that Facebook had paid third-party contractors for transcribing user conversations.
See also: Analysts Share Their View On FANG Stocks And Apple
Twitter is a platform for the public to express themselves and converse in real time with a 140-character restriction, and its services are available in more than 40 languages around the world.
After listing in late 2013 and rising to a high of $74.73 on Dec. 26, 2013, the shares languished, bottoming at $13.74 on May 24, 2016.
The lackadaisical performance was due to the inability of the company to boost its user metrics and in turn make a profit.
The company was rumored to be a takeover target for the better part of 2016, although a firm deal failed to materialize.
After consolidating around the lower levels until late 2017, Twitter shares have been staging a recovery ever since.
In 2018, Twitter enacted measures such as strengthening its sign-up and account verification processes; preventing abuse of Twitter data; updating rules to address specific types of hateful conduct; making it easier to see when a tweet was removed for violating rules; and organizing tweets based on behavior-based signals.
The initiatives helped bring down reports of spam or suspicious behavior across all tweet detail pages by 18%, CEO Jack Dorsey said on the 2019 second-quarter call.
Twitter is guiding to a 20% increase in expenses and a similar increase in headcount in 2019.
For the third quarter, the company guided to revenue of $815 million to $875 million, surrounding the then-consensus estimate of $872 million.
"Increasing the stability, performance and scale of our ad platform in general and our mobile application download product, in particular, will take place over multiple quarters with a gradual impact on revenue," Twitter CFO Ned Segal said on the earnings call.
Snap
Snap, which went public on March 2, 2017 at $17, dropped to a low of $4.82 on Dec. 21, 2018.
Since then, the stock has had a strong run as the company has delivered solid results and returned to user growth.
Snap calls itself a camera company, with its flagship Snapchat application allowing people to communicate visually through short videos and images.
Its products include Camera, Friends Page, Discover, Snap Map, Memories and Spectacles.
Snap's revenue primarily comes from advertising. Although Snap managed to post DAU growth of 8% in the recent second quarter, analysts are still skeptical of the way forward.
The bulk of Snap's users fall in the 18-34 age demographic, and in the U.S. — its key market — more than two-thirds of that age group are already users, leaving a limited scope for user base expansion.
5-Year Revenue Comparison
Facebook seems to be the clear winner, having consistently generated revenue growth in excess of 35% over the past five years. Snap's revenue growth, though commendable, seems to be decelerating.
Twitter's top line reflects its turnaround efforts in recent quarters.
5-Year EPS Comparison
Facebook once again outperforms on bottom-line performance. It has generated profit in the past five years.
For Twitter, 2018 was a turnaround year, as it reversed to a profit after bleeding on the bottom line. Late entrant Snap is still showing red on its bottom line.
Key Metrics As Of June 30, 2019
In terms of user statistics revealed by their recent quarterly results, Twitter has scored over the rest, with double-digit growth in DAUs. Facebook's DAU growth is stagnating around high-single digit percentage levels. Snap also reported 8% DAU growth.
Stock Analysis Through Ratios
Based on the trailing P/E ratio, Facebook's valuation looks stretched.
The P/E ratio, which measures the stock's market value versus its earnings per share, shows that Facebook is pricier than Twitter as well as the broader market.
Going by the forward P/E, which takes into account the next 12-month earnings per share, Facebook's valuation moderates.
Twitter looks overvalued, or in other words, investors are estimating higher growth for the company in the future.
Since Snap has yet to make a profit, this metric does not apply to the stock.
In terms of price-earnings growth for the next five years, both Facebook and Twitter have a higher forward five-year PEG ratio compared to the broader market.
The PEG ratio is calculated by dividing the price of a security by earnings per share and then dividing it by the expected earnings growth.
On a PEG ratio basis, Twitter appears overvalued relative to Facebook.
None of the companies pays out a dividend.
Key Takeaways
Facebook, with its near-term headwinds and uncertainties, might not be a palatable investment for those looking at a one-year time horizon.
Twitter appears a better bet, given its reasonable near-term valuation and the recent uptick in its business prospects.
That said, Facebook is the gold standard among social media stocks, given its massive size and revenue-generating potential.
If the company emerges unscathed from its near-term issues, its large user base, compelling sister platforms and massive cash hoard could position it for a trajectory of superlative growth.
Related Link: Did Facebook's Q2 Earn A Thumbs Up From Analysts?
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
