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Better Buy: Snap or Facebook?

By Keith Noonan and Keithen Drury – Nov 20, 2021 at 6:35AM

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In a battle between social media innovators, which stock comes out on top?

Social media has already changed the world, but its transformative impact is likely just getting started. Emerging technologies including augmented reality (AR) and the metaverse stand to change how people communicate and see the world, and these trends are likely to produce big wins for leading businesses. 

Snap (SNAP -5.32%) and Meta Platforms (META -4.27%), which was formerly known as Facebook, stand out as two potentially promising stocks for investors looking to benefit from the growth of social media, augmented reality (AR), virtual reality (VR), and the metaverse. With that in mind, investors may be wondering which company looks like the better buy today. Here is the bull case for each stock as well as the verdict on which is the winner.

A person wearing virtual reality goggles grabbing a cube.

Image source: Getty Images.

Snap: Focusing on its future potential

Keithen Drury: Unlike Meta Platforms, Snap doesn't have the government watching over it like a hawk. Being free from that burden allows it to conduct business as it sees fit.

Snap's app Snapchat allows its users to communicate via pictures or videos and has a texting option as well. It also features a map for users to see where their friends are located and it uses augmented reality (AR) to change how the world is viewed through a camera lens. It makes money through ads on its platform via AR promotions or advertisement videos that appear while users view stories. 

Snap has a long way to go to catch up to Meta, but that is what makes it a better buy. During the third quarter, Snap grew its revenue 57% to over $1 billion. Daily active users (DAUs) also grew 23%. The revenue is growing quicker than customers, indicating Snap is doing a better job at monetizing its user base. It grew its average revenue per user (ARPU) significantly over the quarter.

Global North America Europe Rest of World
28% 49% 34% 3%

Source: Snap. Average revenue per user (ARPU) growth year over year.

Even with this strong growth, North American and European users produce ARPU of $8.20 and $1.92, respectively. Meta brings in ARPU of $52.34 for the U.S. and Canada, and $16.50 for Europe. Meta is further ahead, but if Snap can keep growing its revenue, it will be a solid investment.

One significant benchmark Snap has yet to reach is profitability. It does not consistently produce free cash flow and constantly reports a negative net-loss margin. It also dilutes its share count by about 4% yearly. Snap's valuation is also rich; it trades at 23 times sales. Shares have recently taken a tumble, falling over 30% from their September highs. Investors looking to start or add to a position should take advantage of the reduced market price.

Much of Snap's investment thesis hinges on its potential. If it can continue growing its ARPU for each region, it should generate enough revenue to overcome its expenses. Snap investors need to be aware of the risks associated with the business. For one thing, social media platforms can go out of style quickly. However, with 90% of 13 to 24-year-olds utilizing the platform in its established markets, Snapchat is "front of mind" for an important demographic.

Meta Platforms: These foundations are too strong to ignore

Keith Noonan: Meta Platforms is a proven winner with massive resources at its disposal. In addition to its sizable cash pile, the company also has a clear leadership position in social media that should help it capitalize on new growth opportunities. Roughly 45% of the world's population interacts with its services, which include Facebook, Instagram, and WhatsApp.

Snap is a promising company in many respects, and the fact that it's still relatively small compared to Meta Platforms suggests it may have an easier time delivering relative growth. However, I think that Meta's resource advantage gives it a better risk-reward dynamic. 

Meta Platforms has established itself as a top player in the digital-advertising market and proven that it can generate enormous profits while still making big investments to drive future growth. Despite its already massive size, Facebook managed to boost sales 35% year over year in the third quarter, and net income came in 17% higher compared to the prior-year period.

The Facebook platform alone closed out September with roughly 2.9 billion monthly active users. Across the company's overall product portfolio, it ended the period with nearly 3.6 billion monthly active users. 

Meta Platforms has also been making some big acquisitions, bringing talented video game-and-app development studios under its corporate umbrella and positioning itself to be a long-term winner in interactive content. The company's Oculus platform is already at the forefront of VR, and the social media leader's incredible reach and breadth of resources should help it become a market leader in AR and the metaverse, as well. 

Meta Platforms is admittedly facing some brand and regulatory challenges. The company's massive size, domination of the social media space, and content policies have put it in prime position for scrutiny at a time when the regulation of social networking platforms is a hot-button issue. To some extent, the rebranding from "Facebook" to "Meta Platforms" reflects this dimension of risks associated with the company, but I think there's a good chance that the tech giant can navigate these challenges.

Which stock is right for you?

Snap and Meta Platforms each have intriguing growth potential and look primed to shape potentially revolutionary technology and communication trends. This is a case where investors who see promise in AR, VR, and the metaverse may want to buy both stocks. 

Otherwise, it's probably best to approach a choice between the two with your personal risk tolerance and growth targets in mind. Snap stock may be capable of delivering more explosive growth, but Meta Platforms looks like it could still have big upside despite potential challenges around regulations and public image.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Keithen Drury has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Meta Platforms, Inc. The Motley Fool has a disclosure policy.

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