Facebook (META -4.13%) is considered by many to be a top investment in the booming social media market. Its namesake platform serves 2.8 billion monthly active users (MAUs), making it the world's largest social network by a mile, and 3.3 billion people access its family of apps -- including Messenger, Instagram, and WhatsApp -- every month.
Facebook's revenue and earnings rose 22% and 57%, respectively, in fiscal 2020, as it overcame a pandemic-induced dip in ad spending in the first half of the year. Analysts expect its revenue and earnings to rise 25% and 13%, respectively, this year -- and the stock still looks surprisingly cheap at 20 times forward earnings.
But despite those strengths, I sold my shares of Facebook last month, for three simple reasons. First, the deadly Capitol riot indicates it is losing control of its own platform. Second, Facebook's growth will likely decelerate as Apple starts allowing iOS users to opt out of targeted ads this year. Lastly, the regulatory headwinds -- which include calls for the company to divest its other apps and be held accountable for its users' actions -- are too fierce to ignore.
Image source: Facebook.
So instead of sticking with Facebook, I retained my long-term position in Snap (SNAP -4.04%) and started a new position in Pinterest (PINS -1.55%). Here's why I believe these two social media stocks will continue to outperform Facebook over the next few years.
Avoiding Facebook's biggest problems
Snap and Pinterest have both carved out high-growth niches in the social media market. Snap's Snapchat has captured the Gen Z and millennial markets with its ephemeral messages, AR lenses, and Discover videos. And Pinterest has attracted older female users with its virtual pinboards, which encouraged them to share their interests, ideas, and hobbies with other users.
Snap and Pinterest have both established first-mover's advantages in their markets. Facebook cloned many of Snapchat's features and baked them into Messenger and Instagram, but Snapchat kept growing. Facebook launched a Pinterest clone called Hobbi last February but killed it off after just a few months.
Snap and Pinterest have also been well-insulated from the misinformation controversies that have plagued Facebook and Twitter throughout the election cycle and the pandemic, since neither platform is generally used to share news stories or political opinions.
Snap and Pinterest also serve much smaller audiences than Facebook, which shields them from antitrust probes. In fact, both companies would likely profit from any crackdowns on Facebook's family of apps.
Snap and Pinterest are growing much faster
Snap's daily active users (DAUs) rose 22% year over year to 265 million last quarter, representing an acceleration from its previous quarter.
Image source: Getty Images.
Its revenue jumped 62% year over year to $911 million, marking its strongest quarterly growth in three years. Its average revenue per user (ARPU) jumped 33% to $3.44, marking its strongest growth in five quarters.
Snap's adjusted EBITDA also quadrupled to $166 million as its non-GAAP EPS tripled. Snap attributed those incredible growth rates to the expansion of its ecosystem with new Discover videos, AR lenses, and in-app games, and its rising pricing power in online ads.
Pinterest's MAUs rose 37% year over year to 459 million last quarter. Its ARPU increased 12% to $4.26, and its total revenue surged 48% to $1.69 billion. Its adjusted EBITDA nearly quadrupled to $299.2 million, and its non-GAAP earnings more than tripled.
Pinterest attributed its growth to its overseas expansion, as well as robust demand for its sponsored and "shoppable" pins, which many retailers used to upload their entire catalogs. Pinterest's design -- which allows users to share home, fashion, travel, and other ideas on its platform -- arguably makes it a much more organic "social shopping" experience than Instagram.
Snap and Pinterest aren't profitable by GAAP measures yet, mainly due to high stock-based compensation expenses. But in the near term, the market will likely focus on their growth in revenue and users.
Rosy expectations and reasonable valuations
We should always be skeptical of analysts' estimates, but Snap and Pinterest are both expected to generate much stronger revenue growth than Facebook over the next two years:
|
Estimated Revenue Growth (YOY) |
FY 2021 |
FY 2022 |
|---|---|---|
|
Snap |
50% |
38% |
|
|
48% |
36% |
|
|
25% |
20% |
Data source: Yahoo Finance, Feb. 24. YOY = Year over year.
Based on these projections, Snap and Pinterest trade at about 28 and 22 times this year's sales, respectively. Those valuations are high, especially when Facebook trades at just seven times this year's sales -- but they remain cheaper than those of many other high-growth tech stocks.
Those analysts' estimates could even be too low. Snap recently declared that it could maintain over 50% sales growth for "multiple years" at its first-ever investor day. If Snap delivers on that promise, its price-to-sales ratio could contract quickly as its profitability improves. I wouldn't be surprised if Pinterest makes a similar long-term prediction and forces analysts to rethink their expectations.
The bottom line
Facebook isn't doomed, but I no longer want to own its stock, for both ethical and fundamental reasons. If you feel the same way, consider replacing Facebook with Snap and Pinterest as your main social media investments.
