Pinterest, which hit an all-time high of $89.90 last February, shed about 70% of its value as investors fretted over its ongoing loss of monthly active users (MAUs) in a post-lockdown market. Snap, which hit a record high of $83.34 last September, stumbled more than 50% as Apple's (AAPL 0.68%) privacy changes on iOS temporarily derailed its advertising business.
However, both social media stocks recently rebounded from their 52-week lows after they posted their fourth-quarter earnings reports. Pinterest predicted its sequential loss of MAUs would gradually stabilize, while Snap countered Apple's iOS update by shrewdly tweaking its ad formats.
But should investors buy Pinterest or Snap in this challenging market for growth stocks? Let's take a fresh look at both companies to decide.
Reviewing the main challenges
Pinterest and Snap's Snapchat are very different types of social media platforms, but they both generate most of their revenue from ads.
The popularity of Pinterest's pinboards soared throughout the pandemic as people stayed home and searched for more recipes, hobbies, do-it-yourself (DIY) projects, family activities, and online shopping ideas. But its growth decelerated as the lockdown measures were relaxed, and its MAUs dropped from a peak of 478 million in the first quarter of 2021 to 431 million in the fourth quarter.
That slowdown overshadowed its sequential growth in average revenue per user (ARPU) over the past three quarters, as well as its ability to gradually evolve into a "social shopping" platform with its Sponsored Pins, Idea Pins, native video content, and partnership with Shopify.
Snapchat's growth in daily active users (DAUs) remained broadly stable throughout the pandemic as well as in the post-lockdown market. It ended its latest quarter with 319 million DAUs, and it year-over-year DAU growth has stayed above 20% over the past five quarters.
However, Snap dropped the ball last year by underestimating the impact of Apple's privacy update on its targeted ads. Its complacency resulted in a disappointing revenue miss in the third quarter, but it redeemed itself in the fourth quarter by reducing its dependence on third-party data, expanding its own first-party advertising tools, and rolling out more multi-platform ads.
Reviewing the growth rates
Pinterest's revenue rose 52% to $2.58 billion in 2021. But its revenue growth decelerated significantly in the second half of the year mainly due to its slower MAU growth, its focus on lower-revenue ad formats (Idea Pins and native videos), and lower ad sales to consumer packaged goods companies. However, Pinterest wasn't meaningfully affected by Apple's iOS update because it primarily relies on first-party and contextual ads.
Pinterest expects its revenue to improve by the "high teens" on a year-over-year basis in the first quarter of 2022, and analysts expect its revenue to increase 23% for the full year. During Pinterest's fourth-quarter report, it noted that its MAUs had grown between Jan. 1 and Feb. 1, which indicates its sequential MAU growth might finally stabilize again.
Snap's revenue rose 64% to $4.12 billion in 2021. Its revenue growth also decelerated in the second half of the year as it grappled with the impact of Apple's privacy update on its direct response ads. However, Snap also deepened its pool of first-party data and relied on new tracking tools like Snap Pixel (a piece of code which tracks a user's actions on a website) to counter Apple's changes.
As a result, the price of Snap's ads rose 46% year over year in the fourth quarter. This price increase indicates that the company's popularity with younger users still gives it plenty of pricing power with advertisers. Snap expects its revenue to grow 34% to 40% year over year in the first quarter, and analysts expect its revenue to increase 33% for the full year.
The profits and valuations
Pinterest was profitable by both generally accepted accounting principles (GAAP) and non-GAAP metrics in 2021. Snap remains unprofitable on an annual basis, but it posted its first GAAP profit in the fourth quarter of 2021 -- thanks to its investments and other one-time benefits -- and its annual net loss narrowed significantly.
Pinterest's non-GAAP net income rose 175% to $778 million in 2021. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 167% to $814 million, which boosted its adjusted EBITDA margin from 18% to 32%. Analysts expect its non-GAAP earnings per share (EPS) to grow 16% this year. Based on that forecast, Pinterest's stock looks reasonably valued at about 21 times forward earnings.
Snap generated $775 million in non-GAAP net income in 2021 compared to a net loss of $91 million in 2020. Its adjusted EBITDA skyrocketed 1,265% to $617 million, while its adjusted EBITDA margin expanded from 2% to 15%. Analysts expect Snap's non-GAAP EPS to rise 6% for the full year, and its stock trades at about 74 times that estimate.
The winner: Snap
Pinterest's stock initially seems cheaper. But Snap's user growth is more stable; it isn't pivoting toward lower-value ads; and it doesn't face any challenging post-lockdown comparisons.
Therefore, I'd much rather pay a premium for Snap's healthy business than to roll the dice on Pinterest's potential turnaround over the next few quarters.