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Better Buy: Facebook vs. Snap

By Will Healy - Dec 2, 2020 at 9:30AM

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Should investors choose the social media giant or the niche competitor?

Facebook ( FB -4.27% ) has become the dominant company in the social media space. But it does not hold a monopoly, and companies such as Snap ( SNAP -0.73% ) have managed to carve out niches and fight for a piece of the social media market.

The fact that Snap and Facebook's other competitors can thrive shows that competition remains in the social media space. For investors, it leads to the question of whether investors should opt for Facebook with its size and influence, or might they turn to a smaller company such as Snap in pursuit of higher potential returns?

Let's review some facts and information about both media stocks to see which might be the better buy for the investing public.

A teenage girl staring at her smartphone as she lays in bed.

Image source: Getty Images.

The state of Facebook

Facebook has emerged as the largest social media stock and one of the biggest stocks in all of tech. It has done so by attracting 3.2 billion monthly active users to one of its "family" of sites or apps.

To put that into perspective, the current world population is around 7.7 billion. This means almost 42% of people worldwide engage with a Facebook-owned site. Although this is a feat unmatched by almost any company, it also leaves new investors wondering where Facebook can find additional revenue growth.

For now, Facebook has answered that question through its ad business. In the most recent quarter, revenue increased by 22% from year-ago levels. Diluted earnings per share also increased by 28%. The company managed to produce these increases despite pandemic-related pressures on the economy.

The company also plans to derive more revenue through other product lines. It has been a pioneer in the virtual reality (VR) space by marketing its Oculus products, including the Quest 2 headsets.

The company also expressed a belief that fourth-quarter ad revenue would increase sequentially from third-quarter levels. Still, Facebook worries about headwinds in 2021. These concerns stem from commerce returning to offline channels following the pandemic-induced lockdowns as well as changes to platforms such as Apple's iOS 14 and the current regulatory environment.

But the company faces no obvious threat to its dominance. Also, with nearly $56 billion in liquidity, Facebook controls its destiny. Despite its massive user base, it should maintain double-digit profit growth for the foreseeable future.

How Snap fares

Snap has become a turnaround story. It faced significant threats as Facebook launched various Instagram features to compete for its customers. Having Facebook and Instagram copy functions such as Snapchat Stories also threatened the company's survival at various times over the fast few years.

But Snap staged a dramatic turnaround when it finally figured out how to succeed with its online advertising. It has attracted further viewership by developing proprietary content designed for viewing on Snapchat. Its Lens Studio, an augmented reality feature, also drives usage.

More recently, the copied has become the copier. Snapchat introduced Spotlight, which highlights viral videos. It probably made this move to respond to increasing competition from ByteDance's TikTok.

The company now boasts 249 million daily active users. Although not really comparable to Facebook's user base, that figure is an 18% increase over the prior year. The number of Snaps (i.e, usage of the app) also rose by 25% over the same period. In the most recent quarter, revenue increased 52% from year-ago levels. The company also reported adjusted earnings per share of $0.01 for the same period.

Despite these improvements, Snap has remained cautious. In the report, the company declined to provide any guidance, even for the upcoming quarter.

Nonetheless, CFO Derek Andersen mentioned that Q4 revenue growth of 47% to 50% from the same quarter last year was "attainable." Hence, Snap appears poised to remain in a growth mode for now.

Facebook or Snap?

As someone who once thought Snap was the next Myspace, I have had to back away from that claim. Snap has made the changes necessary to make its Snapchat app a viable player in the social media space.

Despite the improvements for Snap, I would still recommend Facebook between the two. Its path to growth will continue into the foreseeable future. Also, the size of its user base and growing profits make it seemingly unstoppable.

Conversely, Snap is barely profitable and continues to face intense competition from Facebook and competitors like TikTok. While I will compliment Snap's management for fostering huge growth numbers lately and orchestrating a dramatic turnaround, it remains a vulnerable company.

Moreover, Facebook's cash hoard gives the company both stability and flexibility. Since investors can still benefit from Facebook's high growth levels, the higher risks associated with Snap stock make it a less attractive investment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$310.60 (-4.27%) $-13.86
Snap Inc. Stock Quote
Snap Inc.
$47.26 (-0.73%) $0.35

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