Twitter (TWTR +0.00%) and Snap (SNAP +4.79%) are often considered social media underdogs struggling in the shadow of Facebook (FB +0.80%). After all, both platforms reach just a fraction of the users that Facebook's massive ecosystem (including its namesake app, Instagram, and WhatsApp) hits.
Yet Twitter and Snap stocks both recently rallied sharply after the companies released their latest earnings reports. Let's take a closer look at their numbers to see if either stock is a worthy buy.
Image source: Getty Images.
Which company is growing faster?
Twitter's monetizable daily active users (mDAUs), which filters out spammers and bots, rose 4% sequentially and 14% annually to 139 million in the second quarter. That growth mainly came from a 15% annual jump in its international mDAUs, which hit 110 million. Its mDAUs in the U.S. rose 11% to 29 million.
Snap's total DAUs grew 7% sequentially and 8% annually to 203 million during the second quarter. Its DAUs rose 3% annually to 83 million in North America, 5% to 64 million in Europe, and 21% to 56 million in the Rest of the World.
Simply put, both companies now rely more heavily on overseas users than domestic ones. That can be a double-edged sword -- overseas users might generate higher sales growth, but revenue per user can be lower in developing markets, and a strong dollar can exacerbate that pain.
Snap generates almost all of its revenue from ads. Most of Twitter's revenue also comes from ads, but nearly 14% of its revenue last quarter came from its data licensing business, which sells feeds of tweets to companies. Here's how Snap's year-over-year revenue growth compared to Twitter's over the past year:
|
Company |
Q2 2018 |
Q3 2018 |
Q4 2018 |
Q1 2019 |
Q2 2019 |
|---|---|---|---|---|---|
|
Snap |
44% |
43% |
36% |
39% |
48% |
|
|
24% |
29% |
25% |
18% |
18% |
Year-over-year revenue growth. Source: Company quarterly reports.
Snap clearly generates stronger revenue growth from a larger group of DAUs than Twitter. It attributed its accelerating sales growth last quarter to the redesign of its Android app, which boosted engagement and retention rates, as well as the expansion of its ecosystem with fresh Discover content, original videos, and AR lenses and games, which kept users locked into Snapchat.
Twitter's revenue growth decelerated significantly as it focused on clearing out bots, spammers, fake accounts, and inappropriate content. Twitter also recently redesigned its website to simplify its interface, but the change polarized users, and it's unclear if it will hobble its mDAU growth over the next few quarters.
Snap expects its revenue to rise 38%-46% annually in the third quarter, while Twitter anticipates 8%-15% growth. Neither company provided full-year revenue guidance, but analysts expect Snap's revenue to rise 44% and for Twitter's revenue to grow 16%.
Image source: Getty Images.
Which company is more profitable?
Snap generates stronger revenue growth than Twitter, but Twitter's focus on cutting costs made it much more profitable.
Snap generated $388 million in revenue last quarter, but it posted a net loss of $255 million -- which nonetheless marked an improvement from its loss of $353 million a year earlier. Snap is focused on narrowing its losses and achieving a positive free cash flow, but it's still burning through its cash quickly -- its cash and equivalents fell from $387 million at the end of 2018 to $336 million at the end of the second quarter.
Twitter's reported net income, which benefited heavily from income tax benefits, rose eleven-fold annually to $1.1 billion in the second quarter. On an adjusted basis, which excludes those big one-time benefits, its net income declined 36% to $58 million. That dip was caused by higher investments in maintaining its platform (including weeding out of fake and malicious accounts), which offset savings from other cost-cutting efforts.
Neither company offered bottom-line guidance for the full year. Analysts expect Snap's earnings to stay deep in the red, and for Twitter's adjusted EPS to rise 23% as it dials back its investments in the second half of the year.
The valuations and verdict
Twitter and Snap are tough to compare since the former is profitable and the latter isn't.
In terms of sales growth, Snap, which trades at 11 times next year's sales, looks like a better bet than Twitter, which trades at eight times forward sales with a much slower growth rate. Twitter is profitable, but its forward P/E of 38 looks pricey relative to its growth potential.
If I had to choose one of these stocks, I'd pick Snap over Twitter. Snapchat has more users (especially younger ones), stronger revenue growth, and clearer ecosystem expansion plans than Twitter. It still faces a long road toward profitability, but I think it has more room to run.
