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Better Comeback Play: Twitter Inc. or Snap Inc.?

By Leo Sun - Feb 12, 2018 at 7:06AM

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Are these two maligned social media stocks ready to rebound?

Snap (SNAP -5.95%) and Twitter (TWTR -1.08%), two social media stocks which many investors had left for dead, recently roared back to life. Snap's stock surged nearly 50% on Feb. 7 after its fourth-quarter numbers topped analyst estimates. Twitter's stock jumped 12% the following day as its fourth-quarter figures beat expectations and the company posted its first-ever profit.

I've been bearish on both stocks for a long time. Last May, I called both stocks "lemons" of the industry, due to their weak user growth and lack of profits. But with both stocks now back above their IPO prices, are brighter days ahead? Let's take a closer look at both companies' latest reports and see if either stock is a worthy comeback play.

A young woman takes a selfie.

Image source: Getty Images.

Why did Snap rally?

Snap's fourth-quarter revenue rose 72% annually to $285.7 million, beating expectations by almost $33 million. Its daily active users (DAUs) grew 18% annually to 187 million as its average revenue per user climbed 46% to $1.53.

All three key figures were higher than the annual growth rates it reported in the third quarter, indicating that Snap's growth hadn't peaked yet. The company attributed that acceleration to its redesign of Snapchat, improvements for Android users, and a switch to programmatic (automated) ad buys, which attracted more advertisers to offset lower ad prices.

Snap's non-GAAP net loss also narrowed from $158.3 million in the prior year quarter to $156.1 million. On a per-share basis, its loss narrowed from $0.19 to $0.13, beating estimates by three cents. But on a GAAP basis, its loss still widened from $169.9 million in the prior year quarter to a whopping loss of $350 million.

Why did Twitter rally?

Twitter's fourth-quarter revenue rose 2% annually to $732 million, beating estimates by nearly $46 million. Its monthly active users (MAUs) rose 4% annually to 330 million. Twitter didn't reveal the exact number of DAUs, but claimed the figure rose 12% annually.

Its advertising revenues rose 1% annually (with 7% growth in its "owned and operated" ads), which finally broke a multi-quarter streak of declining ad revenues. Twitter attributed that recovery to higher engagement rates, improved revenue-generating features, a higher ROI for advertisers, and better sales execution.

Twitter's non-GAAP net income rose 81% annually to $141 million, or $0.19 per share, which topped expectations by five cents. But more importantly, Twitter posted a GAAP profit of $91 million, compared to a loss of $167 million a year earlier. Twitter achieved that with a 28% annual reduction in its total GAAP expenses -- led by a 26% decline in its stock-based compensation (SBC) expenses.

But let's dig deeper...

Snap and Twitter's headline numbers look solid, but both companies still face major challenges.

A businessman agonizes over a declining chart.

Image source: Getty Images.

The difference between Snap's non-GAAP and GAAP losses can be attributed to its SBC expenses, which jumped from $6.8 million in the prior year quarter to $181 million -- or 63% of its revenues. For comparison, Twitter's SBC expenses only consumed 14% of its revenues.

As a result, Snap reported a negative free cash flow of $197.2 million for the quarter, compared to negative $188.1 million in the prior-year quarter. Twitter's adjusted free cash flow rose 22% annually to $135.3 million last quarter, thanks to its revenue growth and reduced expenses. Snap is also still being targeted by Facebook's (META -1.64%) Instagram, which repeatedly added Snapchat-like features to its app.

Meanwhile, Twitter's MAUs rose year-over-year, but they stayed flat sequentially. Its reluctance to reveal its real DAU figures, or address its ongoing problems with bots and fake accounts, remains frustrating. Its US revenue, which some bulls thought could be lifted by President Trump's seemingly endless tweets, fell 8% annually but was offset by a 17% increase in international revenue.

The continued growth of Twitter's ad business also isn't guaranteed. Its 1% growth in ad revenues during the quarter was fueled by a 75% annual increase in total ad engagements. However, its cost per engagement plunged 42% annually. Therefore, any deceleration in its total engagements could cause its ad revenue growth to turn negative again.

Growth forecasts and valuations

Analysts expect Snap's revenue to grow 60% in fiscal 2018, but for its bottom line to stay deep in the red. They expect Twitter's revenue and non-GAAP earnings to respectively rise 7% and 16% this year, but its continued GAAP profitability isn't guaranteed.

Snap trades at more than 30 times trailing sales. That makes it a much pricier bet than Twitter, which trades at 9 times sales, or Facebook, which trades at 14 times sales.

The better comeback play: Twitter

I personally wouldn't touch either stock right now, especially during a market downturn. But if I had to choose one over the other, I'd stick with Twitter -- it has slower growth than Snap, but it's profitable and has more reasonable valuations.

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Stocks Mentioned

Twitter, Inc. Stock Quote
Twitter, Inc.
TWTR
$37.39 (-1.08%) $0.41
Snap Inc. Stock Quote
Snap Inc.
SNAP
$13.13 (-5.95%) $0.83
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
META
$161.25 (-1.64%) $-2.69

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