Twitter (TWTR) and Snap (SNAP 1.80%) are often considered the underdogs of the social media market. Both companies are dwarfed by Meta Platforms (META 0.96%), which hosts 3.6 billion people each month across its Facebook, Messenger, Instagram, and WhatsApp platforms.
Yet both of these underdogs are still growing. Between 2016 and 2021, Twitter's annual revenue grew at a compound annual growth rate (CAGR) of 15% as Snap's revenue soared at a CAGR of 59%. Will Snap continue to outpace Twitter's growth and generate bigger returns in the future?
Image source: Getty Images.
The differences and similarities
Twitter and Snap's Snapchat serve very different markets. Twitter's users generally use its platform to follow developing news stories and trending topics, or to share their thoughts via short "tweets." Twitter's platform is also more commonly used to follow public figures, celebrities, media outlets, or brands instead of friends or family members.
Snapchat's core platform is built for photo or video-based "snaps" which automatically vanish, but it has added original videos, games, and augmented reality (AR) lenses to its ecosystem. Snapchat lets its users publicly share videos through its Snap Map and Spotlight features, but its main platform still targets smaller networks of family members and friends.
Most Twitter users are between the ages of 25 and 34, while the majority of Snapchat users are between the ages of 18 and 24. Both companies generate most of their revenue from digital ads, but Twitter also owns a smaller data licensing business, which generated 11% of its sales last year.
Twitter is ramping up its spending to hit its 2023 goals
Twitter's revenue rose 37% to $5.08 billion in 2021. Its number of monetizable daily active users (mDAUs) increased 13% to 217 million. That growth was mainly driven by its international mDAUs, which grew 15% to 179 million and offset its sluggish 3% growth in domestic mDAUs.
Twitter believes it can generate at least $7.5 billion in annual revenue in 2023 with 315 million mDAUs. Those goals, which it set during its analyst day presentation a year ago, imply its revenue and mDAUs will rise at a CAGR of 21.5% and 20.5% between 2021 and 2023.
Unlike Meta, Twitter didn't suffer a major slowdown in ad sales as Apple tightened up its privacy standards on iOS. Its average ad prices have also been climbing as it focuses on selling pricier "lower funnel" ads -- which only target potential customers -- instead of cheaper "higher funnel" ads, which are used to broadly build a brand's presence.
However, Twitter is also ramping up its spending to hit its ambitious targets. It posted a net loss of $221 million in 2021, and analysts expect another net loss of $119 million this year as it increases its headcount by about 20%.
Snap continues to fire on all cylinders
Snap's revenue rose 64% to $4.1 billion in 2021. Its DAUs grew 20% to 319 million, as its 11% growth in Europe and 41% growth across the Rest of the World outpaced the 6% growth of its North American business.
Snap also set ambitious growth targets during its investor day presentation last February. It claimed it could grow its revenue by about 50% over the next few years, but Apple's iOS update significantly impacted its growth in the third quarter of 2021 and cast some doubts on those plans.
Snap largely overcame those issues in the fourth quarter with its own first-party data tracking services. Its ad prices also continued to climb as Gen Z-oriented brands launched new ad campaigns. But for now, analysts expect Snap's revenue to rise just 37% in 2022 and 42% in 2023.
Snap narrowed its net loss from $945 million in 2020 to $488 million in 2021, but analysts expect a slightly wider net loss of $560 million this year as it expands overseas and invests in new video, gaming, and AR features.
The valuations and verdict
Twitter and Snap were both battered by the broad sell-off in tech stocks over the past four months. Twitter now trades at five times this year's sales, while Snap trades at 10 times this year's sales.
Snap might initially seem pricier than Twitter, but it's also growing twice as rapidly and has set more ambitious growth targets for the future. Snap also faces fewer controversies regarding free speech, fake news, and censorship than Twitter and other public-facing social platforms.
Therefore, I firmly believe Snap is a better buy than Twitter -- but its lack of profits could limit its near-term appeal in this challenging market.
