Snap (SNAP 5.41%) makes some money each year from its Spectacles camera glasses. Meta Platforms (META 0.82%) generates some revenue each year from its business segment that focuses on the metaverse. However, both Snap and Meta Platforms generate the vast majority of their revenue from advertising on their social media platforms. They are the same that way.
Its details like this about how these social media giants generate revenue that can influence investors' enthusiasm for each stock. As of Feb. 7, Meta's stock price was up 58% year to date and outpacing Snap stock's 35% gain. One assumption investors could take away from this difference in stock price performance is that Meta's recent financial report was better than Snap's. However, there's one important metric common to the two reports that suggest such an assumption might be misleading.
NASDAQ: META
Key Data Points
Ad impressions versus ad rates
On Feb. 1, Meta Platforms reported financial results for the fourth quarter of 2022 and the market loved it. Monthly active users across the company's platforms were up 4% year over year. And ad revenue in the U.S. and Canada was flat compared to the prior-year quarter, which, given the slowdown in advertising spend, was encouraging.
For its part, Snap reported financial results for its fourth quarter of 2022 on Jan. 31. And by comparison, its revenue for North America dropped 6% year over year even though daily active users in North America were up 3%.
At first glance, Meta's financial results look superior to Snap's. But closer inspection tells another tale.
For Meta, the average price per ad, or the ad rate, dropped a whopping 22% year over year in Q4. For Snap, its eCPM, or effective cost per mille, was only down 9%.
Meta's ad rates dropped far more than Snap's. But it made up the difference with higher ad impressions -- the amount of times users were shown an ad. For Meta, ad impressions were up 23% year over year whereas impressions for Snap were only up 8%.
NYSE: SNAP
Key Data Points
Why this could be an underrated problem for Meta
The question that should be on every investors' mind is, "Why did ad rates drop so much?"
The drop is partially attributable to the overall ad space right now. Growth in digital advertising slowed in 2022. And as reported by Forbes magazine, third-party research groups Magna, GroupM, and Dentsu all expect growth in 2023 to be slower still. All three are predicting 5% or less year-over-year growth in spending this year.
However, something else is at play with Meta Platforms. Logically, with only 4% growth in monthly active users, you'd only expect about 4% growth in impressions. To grow impressions by 23%, Meta's users could have browsed the platform for substantially more time and, therefore, could have seen more ads. Or Meta could have increased the frequency at which users were shown ads.
Management didn't explicitly shed light on which was the bigger factor in Q4. But there were hints it might be the latter. As CFO Susan Li said on the earnings call, "The year-over-year decline in pricing was primarily driven by strong impression growth."
Inundating a user with ads happens because more ad slots are made available. And having more ad slots available leads to less competition per slot. That results in lower rates. Hence, impression growth can lead to a pricing decline, which isn't what you want.
By comparison, Snap's impression growth of 8% looks far more reasonable considering it grew daily active users by 3%. Therefore, even though the market liked Meta's financial results better, I believe Snap was the service that showed more relative strength.
Is either stock a buy?
Inundating users with too many ads is an easy way for Meta Platforms to lower ad effectiveness and annoy users. Both those issues can be problematic. As I look at the numbers, this seems to be what's happening, which is troubling. And considering Meta stock has soared year to date, it's actually the stock I would avoid for now.
When it comes to ad rates at the end of 2022, I believe Snap outperformed Meta Platforms, which shareholders should find encouraging. That said, Snap has other issues that keep me from buying the stock today. Specifically, its operating loss in 2022 nearly doubled year over year to $1.4 billion, which is far too great for me to consider this investable at this time.
Therefore, no, I wouldn't buy either of these stocks today. However, I believe the takeaway is that Meta Platforms stock could be particularly vulnerable, considering its operating results weren't as good as its recent stock performance.
