Snap (NYSE:SNAP) and Twitter (NYSE:TWTR) are both considered underdogs in the social media market dominated by Facebook (NASDAQ:FB). Yet Snap's Snapchat remains popular with teen users, and Twitter remains a major megaphone for public figures, media networks, and brands.

The market clearly favors Twitter over Snap -- the former rallied more than 40% this year, while the latter plunged over 50%. Let's examine both stocks to see if those trends will continue into 2019.

A group of young people take a selfie.

Image source: Getty Images.

Which platform reaches more users?

The core growth metric for social networking platforms is active user growth. Snap's daily active users (DAUs) fell 1% sequentially (but grew 5% annually) to 186 million last quarter, marking its second straight quarter of declining DAUs.

Snap doesn't regularly disclose its monthly active user (MAU) count, but it claims that figure exceeds 100 million in North America. Snap's slowing user growth can mostly be attributed to tougher competition from Facebook's Instagram and a poorly received redesign of its app.

Twitter regularly reports its total MAUs, but only discloses its DAU growth in terms of annual growth instead of total users. Twitter's MAUs fell 3% sequentially and 1% annually to 326 million last quarter, but its DAUs rose 9% annually. The gap between those two figures was attributed to a purge of spam and bot accounts, tougher European data protection rules, and some technical issues.

Adopting similar strategies

Snap and Twitter are both clearly struggling to grow their user bases. As a result, both companies pivoted toward programmatic (automated) ad buys to boost their ad revenues. This strategy reduces the prices of individual ads, but higher order volumes offset those lower prices.

That's why Snap's average revenue per user (ARPU) still rose 14% sequentially and 37% annually to $1.60 last quarter. Twitter's average revenue per MAU rose 10% sequentially and 30% annually to $2.33 last quarter.

However, investors should note a key difference here: Snap generates most of its revenue from ads, while Twitter generates 14% of its revenue from its data licensing unit, which sells a "firehose" of Twitter feeds to third-party companies. Snap's ads are also confined to its own platform, while Twitter also sells ads on third-party sites and apps with its Twitter Audience Platform.

A cloud of social networking connections.

Image source: Getty Images.

Snap and Twitter are both trying to boost their ARPU and lock in users by expanding their ecosystems. That's why Snap launched Snappable AR games, Snap Originals, a visual shopping partnership with Amazon, and a new version of Spectacles. Twitter is securing more partnerships for video streams, which should should support the video ad formats that generated over half its revenue last quarter.

Which company is growing faster?

Snap is growing its revenue at a faster rate than Twitter, but its growth is also decelerating as Twitter's growth picks up. That's why Twitter's stock crushed Snap's over the past year.

 

Q4 2017

Q1 2018

Q2 2018

Q3 2018

Twitter

2%

21%

24%

29%

Snap

72%

54%

44%

43%

YOY revenue growth. Source: Company quarterly reports.

Both Snap and Twitter spend a significant percentage of their revenues on stock-based compensation (SBC) expenses, which are included in GAAP earnings but excluded from non-GAAP earnings.

Snap spent 43% of its revenues on SBC expenses last quarter, compared to 107% in the prior year quarter. Twitter spent just 12% of its revenues on SBC expenses last quarter, compared to 17% a year ago.

Both companies slashed their SBC expenses with significant layoffs, but Twitter clearly has better control over those expenses. That's why Twitter is now profitable by both GAAP and non-GAAP metrics, while Snap is unprofitable by both measures.

Last quarter, Twitter's non-GAAP net income surged 109% annually to $163 million, and it reported a GAAP net income of $106 million (which excludes $683 million in deferred tax asset valuation allowances), compared to a loss of $21 million a year earlier. Its adjusted EBITDA also rose 43% to $295 million.

Snap's GAAP loss narrowed slightly from $443 million a year ago to $325 million, and its adjusted EBITDA loss narrowed from $179 million to $138 million. The company thinks that it might eventually reach profitability, but that could be tough to achieve with its decelerating DAU and revenue growth.

The valuations and verdict

Wall Street expects Snap's revenue to rise 41% this year, but for its bottom line to stay deep in the red. Twitter's revenue and earnings are expected to rise 23% and 80%, respectively, this year.

Snap and Twitter trade at 8 times and 9 times this year's revenue estimates, respectively. Twitter also trades at 39 times forward earnings, but it could be years before Snap squeezes out an actual profit.

Twitter is clearly the better all-around investment than Snap, and its ongoing improvements should help it generate stable earnings growth over the next few years. Snap remains in bad shape, and it could slide lower if it doesn't get its act together soon.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Facebook. The Motley Fool owns shares of and recommends Amazon, Facebook, and Twitter. The Motley Fool has the following options: short November 2018 $155 calls on Facebook and long November 2018 $135 puts on Facebook. The Motley Fool has a disclosure policy.