Snap (SNAP -3.81%) and Pinterest (PINS -3.74%) are both rapidly growing social media companies that have managed to thrive in Facebook's shadow. I previously compared these two companies last October, and declared Pinterest's stronger growth rates made it the more compelling buy.
However, Snap's stock has rallied more than 80% since I made that call, while Pinterest's stock has slipped more than 10%. Let's see why Snap outperformed Pinterest by such a wide margin, and whether or not it will remain the stronger social media stock.
The pandemic's impact on Snap and Pinterest
Snap's Snapchat and Pinterest both initially struggled with slower ad spending at the peak of the pandemic. However, both platforms continued to gain new users throughout the year.
Snapchat's daily active users (DAUs) rose 22% to 265 million in 2020, then grew 23% year over year to 293 million in the second quarter of 2021. Its strong sequential growth in the first two quarters impressed investors and boosted Snap's stock to fresh highs this year.
Pinterest's monthly active users (MAUs) rose 37% to 459 million in 2020, but increased just 9% year over year to 454 million in the second quarter of 2021. That sequential loss of MAUs, which occurred entirely in the second quarter, sparked concerns about a post-pandemic slowdown and caused Pinterest's stock to tumble nearly 30% over the past three months.
Snapchat's growth was smoother because its DAUs primarily used the platform to communicate with friends, watch Discover videos, use augmented reality (AR) lenses, and play in-app games. Those engagement rates weren't pinned to stay-at-home measures or reopening trends.
Pinterest's MAU growth stalled out because many of its new users joined the platform to explore stay-at-home activities like recipes, crafts, home improvement projects, and family activities throughout the pandemic. But as people started leaving home, they spent less time on Pinterest.
Which company is growing faster?
Snap's revenue rose 46% to $2.51 billion in 2020, and jumped 91% year over year to $1.75 billion in the first half of 2021 against the pandemic's initial impact on its ad sales a year earlier.
Analysts expect Snap's revenue to rise 68% to $4.2 billion for the full year, and the company expects its revenue to continue rising about 50% annually over the next few years. Snap believes it can achieve that ambitious goal by expanding its self-service advertising platform, selling a higher mix of pricier video and AR ads, and building a "social shopping" ecosystem with visual searches.
Pinterest's revenue increased 48% to $1.69 billion in 2020, then surged 102% year over year to $1.1 billion in the first half of 2021 as its rising average revenue per user (ARPU) and the recovering ad market offset its sequential loss of MAUs.
Pinterest expects to suffer more "engagement headwinds" as COVID-19 restrictions are relaxed globally, but analysts still expect its revenue to rise 55% to $2.62 billion for the full year. Unlike Snap, Pinterest hasn't provided any longer-term guidance for the next few years.
The profitability and valuations
Snap remains unprofitable on a GAAP basis, but its net loss narrowed year over year, from $631.9 million to $438.5 million, in the first half of 2021. It also generated a positive adjusted EBITDA of $115.7 million, compared to an adjusted EBITDA loss of $176.8 million in the first half of 2020. Analysts expect the company to generate its first non-GAAP profit this year.
Based on analysts' expectations, Snap trades at 90 times forward earnings and 27 times this year's sales. The stock isn't cheap, but it's reasonably valued if it can generate roughly 50% sales growth for a few more years.
Pinterest turned profitable on a GAAP basis in the first half of 2021 with a net profit of $47.7 million, compared to its net loss of $241.9 million in the first half of 2020. Its adjusted EBITDA of $262 million also marked a big improvement from its adjusted EBITDA loss of $87 million a year ago.
Pinterest trades at 38 times forward earnings and 13 times this year's sales. It's fundamentally cheaper than Snap, but its lower valuations reflect its uncertain post-pandemic growth. If Pinterest's MAUs stabilize and start to rise sequentially again, its stock could command a higher premium again.
The near-term winner: Snap
I own both stocks, but I believe Snap will outperform Pinterest over the following year because it isn't losing active users and doesn't face a post-pandemic slowdown. Pinterest's stock might perk up again if its user growth stabilizes over the long-term, but Snap's stock should continue to attract a greater number of bulls until that happens.