Snap (SNAP 2.89%) and Twitter (TWTR) are two of the market's best-known social media stocks. Snap's Snapchat remains tremendously popular among younger users, while Twitter remains a top soapbox platform for following public figures, brands, and trending topics.
But over the past 12 months, Snap's stock plunged more than 80% as investors fretted over its slowing growth and widening losses. Twitter's stock tumbled more than 40% as its growth decelerated, Jack Dorsey unexpectedly vacated the CEO post, and his successor Parag Agrawal grappled with an unexpected hostile takeover attempt by Elon Musk.
Should investors consider either fallen social media stock to be a worthwhile turnaround play? Let's dig deeper to decide.
Image source: Getty Images.
What happened to Snap?
During its investor day presentation last February, Snap boldly declared it could grow its annual revenue by more than 50% for "multiple years." That confidence attracted a stampede of bulls to Snap, and its stock price skyrocketed to an all-time high of $83.11 last September.
But Snap now trades at less than $10 a share for three reasons. First, its stock got overheated. At its peak, Snap was valued at $131.4 billion -- or 32 times the sales it would generate in 2021. That nosebleed valuation made it a soft target for the bears as rising rates crushed pricey growth stocks.
Second, Snap's growth decelerated because it underestimated the impact Apple's privacy changes on iOS would have on its ads. Intense competition from ByteDance's TikTok and Meta Platforms' Instagram, along with intensifying macro headwinds for the digital advertising sector, exacerbated that pain.
Snap's revenue rose 64% to $4.1 billion in 2021, but it grew just 24% year over year to $2.2 billion in the first half of 2022. Analysts expect that slowdown to continue with just 21% growth for the full year. Snapchat's daily active users (DAUs) still rose 18% year over year to 347 million in the second quarter of 2022, but its average revenue per user (ARPU) fell 4%.
Lastly, Snap continues to bleed red ink. Its net loss narrowed from $945 million in 2020 to $488 million in 2021, but it widened year over year from $439 million to $782 million in the first half of 2022. Analysts don't expect the company to turn profitable anytime soon, and its elevated debt-to-equity ratio of 1.6 doesn't give it much room to raise fresh cash at reasonable rates.
What happened to Twitter?
Twitter's monetizable daily active users (mDAUs) rose 13% to 217 million in 2021, then grew to 238 million by the end of the second quarter of 2022. That stable growth is encouraging, but it's still unclear if it will achieve its long-term goal of reaching 315 million mDAUs by the end of 2023.
Twitter's revenue rose 37% to $5.1 billion in 2021, accelerating from its 7% growth in 2020, as it prioritized selling pricier "lower funnel" ads -- which directly target potential customers -- instead of cheaper "higher funnel" ads which merely enhance a brand's recognition. Unlike Snap, Twitter didn't struggle as much with Apple's privacy changes because its advertising platform was largely dependent on first-party and contextual data. It's also planning to expand that ecosystem with more social shopping features to reach an ambitious target of $7.5 billion in revenue in 2023.
Twitter's revenue rose just 7% year over year to $2.4 billion in the first half of 2022, but part of that deceleration can be attributed to the sale of its mobile advertising network MoPub to AppLovin this January. Analysts expect its revenue to rise 14% for the full year.
Twitter has been unprofitable over the past two years, but those losses were mainly caused by messy tax-related and legal expenses. Excluding all that noise, it actually generated an adjusted net profit of $165 million in 2021, and analysts expect its adjusted earnings to rise more than eightfold this year. It's also slightly less leveraged than Snap, with a debt-to-equity ratio of 1.3 in its latest quarter.
Twitter's core business seems more stable than Snap's, but many investors have been paying attention to Elon Musk's takeover drama instead. Musk offered to buy Twitter for $54.20 a share in a deal worth $44 billion back in April, and Twitter initially accepted the bid. But Musk is now trying to abandon that deal on grounds that Twitter has too many undisclosed bots, and Twitter is attempting to sue Musk into closing the deal. The lack of clarity regarding that bid makes Twitter a tough stock to recommend.
Should you buy either stock right now?
Snap trades at just three times this year's sales, while Twitter looks a little pricier at five times this year's sales. Twitter also isn't cheap relative to its profits at 40 times forward earnings. I wouldn't rush to buy either stock right now -- but if I had to choose one over the other, I'd stick with Twitter because its growth is more stable, it isn't struggling with Apple's iOS changes, and its balance sheet is stronger.
