Please ensure Javascript is enabled for purposes of website accessibility

2 Top Social Media Stocks to Consider Buying Now -- and 1 to Avoid

By Chris Neiger - Dec 8, 2017 at 7:36PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Facebook and Weibo make the cut, but Snap falls short.

Using social media apps is nearly unavoidable these days, and with the prevalence of these companies growing, some investors are left trying to figure out which ones will make good, long-term investments. Aside from picking great social media stocks, investors also need to know which ones should be avoided right now. 

It's not too hard to guess that social media giant Facebook (META -0.42%) makes the top social media stock buy list, but so does the China-based social media powerhouse Weibo (WB -1.37%). Both companies dominate the social media landscape and will likely continue to do so for years to come. Unfortunately, the freshly IPO'd Snap Inc. (SNAP -5.84%) doesn't earn the same standing. Let's take a quick dive into each company to find out why.

Person holding smartphone with notifications popping up above it.

Image source: Getty Images.

The obvious choice

Facebook crossed an important milestone this year when the company surpassed 2 billion  users on its flagship Facebook platform. I'll wait a minute and let that sink in for you: 2 billion users.

That might be impressive enough to warrant a serious look by investors, but Facebook is also growing its sales and earnings at a healthy clip. In the third quarter of 2017, revenue jumped 47% year over year and net income skyrocketed 79%, easily topping analysts' consensus estimates.

Facebook is far more than just its Facebook platform these days, of course. It also has its popular Messenger app, WhatsApp, virtual reality company Oculus, and Instagram. The latter is becoming an increasingly important part of the company's business as it now has 500 million monthly active users and 2 million advertisers.

The company doesn't break out Instagram's revenue right now, but some of the latest estimates put it between $4 billion and $6 billion in 2017. Facebook has been able to release new features for Instagram over the past couple of years that have helped boost the app's popularity and keep it far ahead of rival Snapchat (more on that in just a bit).

Facebook's share price is up more than 50% over the past 12 months, and with the company's current user growth and expansion into new growth areas like augmented reality, it is continuing to position itself to be the social media juggernaut for years to come.

The China-based social media play

China-based Weibo was originally part of the Sina company until it was spun off on its own in 2014. Weibo's share price has gone gangbusters this year, rising more than 100% over the past 12 months as its user base, sales, and earnings have all spiked. In the third quarter, the company grew its monthly active users by 79 million, revenue increased by a whopping 81%, and net income was up a staggering 215%.

Weibo has not only been able to increase earnings and revenue, but it's also getting its users to engage more with the content on its apps. It was able to increase engagement by 10% for the average user in the most recent quarter, and that's helping to spur sales. According to CEO Gaofei Wang on the earnings call, "I'm happy to see that we are increasingly creating a virtuous cycle of growth on Weibo by translating user base expansion and engagement growth into stronger monetization capabilities."

Weibo also recently released a new version of its app, called Weibo Light, for users with slower internet connections. The stripped-down version should help some of its users better access content on the platform and help continue to grow Weibo's user base.

If all of the above are enough to get investors interested in Weibo, then consider that the social media powerhouse expects sales in the fourth quarter to reach $360 million at the midpoint, which would be a 69% jump year over year.

Woman typing on smartphone.

Image source: Getty Images.

Why you should avoid Snap

There's been a lot of discussion around Snap Inc. since its IPO earlier in 2017, and much of it hasn't been good. The social media company makes the popular Snapchat app, but faced problems with some of its ad sales earlier on, is burning through cash, and user growth isn't as strong as it should be.

Third-quarter revenue spiked by 67% year over year, to $207.9 million. Snap's top line grew, in part, because the company released a new self-serve ad platform that makes buying ads for Snapchat easier and cheaper. Unfortunately, analysts were expecting sales to come in at about $236.9 million for the quarter.

And things got worse from there. Daily active users increased to 178 million, but fell short of the company's own expectations of 181.8 million users. Additionally, Snap had to take a $39.9 million writedown for its camera-enabled glasses, called Spectacles, because it ordered too many of the devices that didn't coincide with demand. 

On top of all of this, Snap is burning through its cash to keep things running. Fellow Fool Evan Niu pointed out recently that Snap has spent 30% of its total cash over the past six months. Its net loss of $443.2 million in the quarter hasn't exactly made investors optimistic about the company, either. Shares have tumbled about 40% since its IPO in March.

Making all of this worse is the fact that Instagram has successfully copied one of Snapchat's most valuable features -- Stories -- and has made it even more popular than the original. Instagram Stories now has 300 million daily active users, compared to Snapchat's entire user base of 178 million. With the increasing competition from Instagram, ongoing losses from Snap's bottom line, and minimal sequential quarterly user growth, there isn't much for investors to look forward to anytime soon with this company.

When it comes to social media plays right now, it appears that long-standing and established players are the way to go. Snap may eventually pull itself together and prove that it has what it takes to become a great company, as well as an investment, but I think investors would be better served by sticking with the leaders for now.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$163.25 (-0.42%) $0.69
Weibo Corporation Stock Quote
Weibo Corporation
$23.06 (-1.37%) $0.32
Snap Inc. Stock Quote
Snap Inc.
$13.14 (-5.84%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.