Given the market-beating gains of social media companies in 2021, we check out which is the better investment right now, Facebook or Snap
Oct. 16, 2021
In the last decade, several companies have built and launched social media platforms on the back of rapid digitalization at a global level. The increase in the number of communication devices led to an exponential rise in the amount of daily screen time, allowing social media companies to attract and engage users all over the world.
This, in turn, has led to a shift in enterprise ad spending as companies now aim to target consumers through digital ads. Social media companies are well poised to benefit from this secular shift, enabling them to drive revenue higher in the upcoming years. Keeping these factors in mind, we analyze whether Snap (NYSE: SNAP) or Facebook (NASDAQ: FB) is a better investment right now.
Snap: the bull vs. the bear
Shares of Snap have more than tripled since the company went public in 2017. However, most of these gains were derived in the last year, where the stock has returned close to 180% since October 2020.
Starting off as a social media entity, Snap has expanded its suite of products and solutions and can now be viewed as a camera company. Its latest product is an augmented reality application which is expected to be a key revenue driver.
Snap has also successfully onboarded retail giants like Nike and Prada that leverage its Wrist Try-On technology to improve customer engagement.
In the second quarter of 2021, Snap’s daily active users rose 23% year-over-year (YoY) to 293 million. Its sales grew by 116% to $982 million. The company forecast revenue between $1.07 billion and $1.085 billion in Q3, while daily active users (DAUs) are expected to touch 301 million.
Despite robust top-line growth, Snap reported a loss of $151 million in Q2, making the stock vulnerable in case markets turn bearish. Given its market cap of $116 billion, Snap stock is also valued at a steep price to sales multiple of 27.55x.
Facebook: the bull vs. the bear
The largest social media company in the world, Facebook increased its daily active users by 12% to 2.76 billion in Q2, across its portfolio of applications that include Facebook, WhatsApp, Messenger, and Instagram.
Driven by increased enterprise spending in Q2, Facebook revenue surged higher by 55% year over year. In Q3, analysts expect sales to grow by 37% to $29.5 billion.
Similar to other asset-light tech stocks, Facebook also enjoys a high operating leverage allowing it to double net income to $10.4 billion in the June quarter.
FB stock might also seem undervalued given its trading at a forward price to earnings multiple of 23x. Comparatively, its earnings are forecast to rise at an annual rate of 28.6% in the next five years.
However, investors might be concerned over Facebook’s regulatory issues that have impacted its stock price in recent years. In addition, the Capitol riots which occurred in January might suggest Facebook might be struggling to audit the content on its platform.
So which stock is a better buy right now?
Given its leadership position, solid operating margins, and attractive valuation, Facebook is the undisputed winner when compared to Snap. While Snap is growing at an enviable pace, it also carries significant investment risk due to its negative profit margins and sky-high multiples.