Back in late 2018, Snap's (SNAP -0.31%) stock price dropped to an all-time low of $5 a share -- which was far below its IPO price of $17. At the time, it seemed like Facebook, now known as Meta Platforms (META 2.33%), would render Snapchat obsolete with Instagram Stories.
Nevertheless, Snap survived Meta's relentless assault by locking in its core audience of younger users with new AR lenses, games, and short videos. It started gaining more users again as it expanded overseas, and its stock rebounded and closed at an all-time high of $83.11 last September. However, Snap's stock has subsequently tumbled back to about $30 per share.
Image source: Getty Images.
Meta's stock also hit an all-time high of $382.18 last September, as investors cheered on its robust growth in users and ad revenue. They also seemed optimistic about its expansion into the metaverse with virtual reality headsets and services. But today, its shares trade in the low $180s.
Let's see why these two social media stocks tumbled over the past seven months, and if either one can bounce back in this challenging market.
Why did Snap lose its momentum?
Snap's stock skyrocketed then declined for three main reasons. First, it set the bar too high during its investor day presentation last February. It claimed it could grow its annual revenue by about 50% over the next few years, and that ambitious goal attracted a stampede of bulls. But when it started falling short of those estimates, the bears brought down the stock.
Second, Snap underestimated the impact of Apple's iOS update, which let users opt out of certain data-tracking features. That miscalculation resulted in a top-line miss in the third quarter of 2021 and softer expectations for its near-term growth. It partly resolved those issues in the fourth quarter by rolling out new advertising tools, but those headwinds continued to throttle its growth in the first quarter of 2022.
Lastly, Snap's stock got overheated last year. At its all-time high last September, Snap was valued at $131 billion -- or 23 times the sales it's expected to generate in 2022. That price-to-sales ratio proved unsustainable as inflation, rising interest rates, and other macroeconomic headwinds curbed the market's appetite for pricier growth stocks.
Snap's revenue rose 64% to $4.1 billion in 2021 and grew 38% year over year in the first quarter of 2022. It expects its revenue to rise 20%-25% in the second quarter, and analysts anticipate 37% growth for the full year.
Snap also grew its daily active users (DAUs) 18% year over year to 332 million in the first quarter. Those growth rates are impressive, but Snap remains unprofitable and it's still falling short of its investor day targets. That slowdown made it tough to justify Snap's high valuations last year -- but its stock now looks more reasonably valued today at nine times this year's sales.
Why did Meta's stock crash?
Most of Meta's recent decline occurred after its messy fourth-quarter earnings report in February, which revealed three glaring problems.
First, Meta's main platform Facebook lost about half a million DAUs sequentially, which represented its first loss of DAUs. It still gained DAUs in Europe and Asia, but it lost users across all of its other regions.
Second, Meta predicted its revenue would only rise 3%-11% year over year in the first quarter of 2022. It blamed that slowdown on Apple's iOS update, which seemingly impacted its core platforms a lot more than Snapchat, as well as competition from ByteDance's TikTok in short videos.
It plans to ramp up its spending to expand Facebook and Instagram's short video features to counter TikTok, but it warned investors that those videos would also be more difficult to monetize than traditional ads.
Lastly, Meta revealed that its Reality Labs segment, which produces its VR and AR devices and software, racked up an operating loss of $10.2 billion in 2021 while generating just $2.3 billion in revenue. It plans to continue pouring cash into that money-losing business to expand its "metaverse" ecosystem.
Meta's revenue and earnings per share (EPS) grew 37% and 36%, respectively, in 2021. But in 2022, analysts expect its revenue to rise just 12% and for its EPS to drop 11% as it grapples with its decelerating user growth and rising expenses. That's why Meta is now the cheapest FAANG stock with a forward price-to-earnings ratio of 16: Investors simply don't expect the tech giant to get its act together anytime soon.
The winner: Snap
Snap and Meta could both struggle to rally as rising interest rates slam higher-growth tech stocks. But if I had to choose one over the other, I'd buy Snap because it's growing faster, it's handling Apple's changes more efficiently, and its stock is now reasonably valued. Snap also won't need to deal with the regulatory headwinds that could throttle Meta's long-term growth.
