Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Snap vs. Pinterest

By Billy Duberstein – Aug 11, 2021 at 6:45AM

Key Points

  • Snap surged after earnings, but is the stock now too expensive?
  • Pinterest plunged in earnings, but has the hate gone too far?
  • Let’s dive in to which social media stock is the best buy today.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One social media stock surged, another plummeted this earnings season. Which is the better buy now?

OSocial media stocks have been some of the biggest beneficiaries of the COVID-19 pandemic. During lockdowns, engagement on these new-age platforms increased. Then, as the economy recovered, advertising dollars returned to these platforms with a vengeance, leading to booming revenue growth.

And yet, not all social media stocks are the same, with each platform differently positioned amid the economic reopening. That was on display this earnings season, with up-and-comers Snap, Inc. (SNAP -1.36%) and Pinterest (PINS -0.16%) moving in vastly different directions. Snap surged almost 25%, and Pinterest plunged almost 20% immediately after disclosing second-quarter results.

But after each stock's big move, which social media stock is the best bet now?

A trio of people look at one's smartphone outdoors.

Image source: Getty Images.

Active user growth determined each stock's move

Lapping easy comparisons with the first full quarter of lockdowns a year ago, both companies actually saw similar revenue growth. Snap's revenue surged 116%, while Pinterest's revenue grew an even higher 125%.

So why did Pinterest plunge while Snap surged? While Pinterest greatly improved its monetization, monthly active users (MAUs) grew only 9%, with U.S. monthly active users actually declining 5%. That's in stark contrast to Snap, which saw 23% daily active user growth and 6% growth in North America.

Since future revenues ultimately come from users and engagement, it's not unreasonable that investors would bid Snap's shares higher and Pinterest's stock lower, despite Pinterest's stronger revenue growth.

But Snap is much more expensive today

After each stock's move, Snap is valued at a whopping 34 times sales, while Pinterest is only valued at around half that, at 17.5 times sales. Not only is Pinterest far cheaper, it's actually profitable, earning $69 million in GAAP net income last quarter. Meanwhile, despite booming growth, Snap isn't yet profitable, logging a $152 million net loss in the second quarter.

Of course, investors aren't exactly concerned with near-term profits for high-growth tech stocks. And in Snap's defense, its losses narrowed by over 50%, with gross margins expanding by nine percentage points, and infrastructure costs down from $0.69 per DAU last year to $0.62 per DAU last quarter.

Operating expenses were only up 39%, far less than revenue growth, even as the company invested in a slew of new innovations, including advanced augmented reality and virtual reality applications; Spotlights, which are sort of like stories made by creators for large audiences; and original shows and video games designed for Snap's platform.

Snap has been doubted many times before, with skeptics pointing to perpetual losses, and the ability of rival platforms such as Instagram to easily mimic its features. However, Snap's consistent innovation and loyalty among young users appear to be sustainable, and it's paying off big today.

What Pinterest shareholders can learn from Snap's experience

It makes sense that Pinterest's user growth may decelerate or go in reverse more than Snap's amid the reopening; after all, Pinterest's app is geared to finding interesting home goods and items, or perhaps a new recipe. In contrast, Snapchat is more about communication between friends and sharing experiences, whether at home or on-the-go out of the house.

In addition, Pinterest shareholders may actually take heart from Snap's experience. After going public in 2017, Snap's stock struggled mightily for years. In fact, in late 2017, user growth was lagging, and Snap decided to totally revamp its app. Not all users liked the changes, with many -- including celebrities like Kylie Jenner -- bashing the revamped changes. Just one year after going public, the stock plunged far below its IPO price.

However, eventually Snap's commitment to continuous improvement and innovation paid off. After three years of its stock trading below the levels seen on its IPO date, Snap's stock finally took off around the middle of 2020. The stock has basically tripled since then, and is up some 12 times over its all-time lows.

Could the same happen for Pinterest? Well, Pinterest has actually done far better than Snap did in its first two years. Even after last month's plunge, Pinterest's stock is still about 2.5 times its IPO price from two years ago.

Yet in spite of temporary headwinds, Pinterest is also innovating at a rapid pace. Currently, Pinterest is expanding into video formats, with "Idea Pins" on the creator side, giving users the ability to make short-form videos to complement their pins, as well as video ads to complement the new format. Management said Idea Pins have grown seven-fold since the beginning of the year, and the company has yet to even really monetize this new product format. CEO Ben Silbermann said on the conference call with analysts:

I might remind folks that we went through a similar exercise with shopping over the last couple years where we made an investment in the user experience first to find product market fit before we put our foot on the gas around monetizing. And I view this similarly: we're investing in the user experience to get this content marketplace up and running with Idea Pins on the belief that with the right product market fit, will drive organic engagement and be able to follow with monetizable engagement over time. 

Pinterest management has been able to monetize new products and ad auction formats in the past, so there's a good chance it could succeed again. If it does, the recent dip could be a great long-term opportunity. If you're a Pinterest user and are enjoying the new Idea Pins, you may have a leg up on the rest of the market in getting an early jump on the promise of Idea Pins.

The bottom line is: While Snap's business is firing on all cylinders, it is a very expensive stock, and Pinterest may have been overly punished by the market amid the reopening headwinds. It doesn't appear that Pinterest is any less of a great company than it was prior to the recent quarter, so if I had to choose one social media stock, I'd choose buying Pinterest's dip as the better long-term opportunity.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Pinterest. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
SNAP
$10.18 (-1.36%) $0.14
Pinterest Stock Quote
Pinterest
PINS
$24.99 (-0.16%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
360%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.