Meta Platforms (META 0.43%) and Snap (SNAP 27.63%) struggled with many of the same challenges over the past year. Both social media companies faced tough competition from ByteDance's TikTok, grappled with Apple's privacy changes on iOS, and struggled to sell more ads in a challenging macro environment. Rising interest rates also drove investors to broadly dump their tech stocks and buy more conservative investments.
Meta's stock sank to a seven-year low of $88.09 last November, while Snap's stock closed at $7.33 -- its lowest price in nearly four years -- last October.
But since then, Meta's stock surged nearly 260% as its stabilizing ad revenue, the expansion of its ecosystem, and cost-cutting measures impressed the bulls. Snap's stock has also rallied about 40%, but its advertising revenue is still declining.
Will Meta continue to outperform Snap, or is it time to take a chance on the underdog again?
Image source: Getty Images.
Which company is growing faster?
Meta finished the second quarter (ended June 30) with 3.88 billion people using at least one of its four main apps (Facebook, Messenger, Instagram, and WhatsApp) on a monthly basis. That represented 6% growth from a year earlier. Within that total, Facebook's monthly active users (MAUs) grew 3% year over year to 3.03 billion.
Snapchat's daily active users (DAUs) grew 14% year over year to 397 million in the second quarter. Its subscription-based service, Snapchat+, surpassed 4 million subscribers at the end of 2022, while its TikTok-like Spotlight platform grew MAUs by 51% year over year to 400 million in the same period.
Meta is gaining new users at a slower pace than Snap, but it's also been growing its revenue at a faster rate over the past two quarters.
|
Metric |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
Meta revenue growth (YOY) |
(1%) |
(4%) |
(4%) |
3% |
11% |
|
Snap revenue growth (YOY) |
13% |
6% |
0% |
(7%) |
(4%) |
Data source: Company earnings reports. YOY = Year over year.
That trend will likely continue in the third quarter: Meta expects its revenue to rise 15% to 24% year over year, while Snap anticipates just 0% to 5% growth.
Meta's advertising business is recovering as three catalysts kick in. First, Chinese cross-border e-commerce marketplaces started buying a lot of ads across Facebook and Instagram to reach overseas shoppers. But those online retailers -- which likely include Pinduoduo's Temu, Alibaba Group's AliExpress, and Shein -- didn't seem as interested in buying ads on Snapchat.
Second, Meta continued to expand and monetize its short-video platform, Reels, to keep pace with TikTok. It noted that Reels reached an annual revenue run rate of $10 billion at the end of the second quarter, compared to just $3 billion last fall. Snap hasn't disclosed any comparable revenue figures for Spotlight at this writing.
Lastly, Meta rolled out new artificial intelligence (AI)-driven ad recommendations for its News Feed ads to counter Apple's privacy changes on iOS. Snap was also expanding its AI ecosystem with a new AI-powered chatbot and generative AI features for pictures, but those new features aren't generating meaningful revenue yet.
As Meta turns its advertising business around, Snap is expanding into lower-revenue overseas markets to gain more DAUs. Unfortunately, that strategy caused its average revenue per user (ARPU) to decline year over year for five consecutive quarters. Meta's comparable average revenue per family person (across its entire "family" of four apps) rose 5% year over year in the second quarter and ended its five-quarter streak of declining revenue.
For the full year, analysts expect Meta's revenue to rise 9% to $127 billion, but they expect Snap's revenue to decline 2% to $4.5 billion. It's generally a bright red flag when the underdog is growing much slower than the market leader.
Which company is more profitable?
Meta remains firmly profitable on a generally accepted accounting principles (GAAP) basis. It's burning billions of dollars every year on its unprofitable Reality Labs business, which houses its virtual and augmented reality devices, but the company offsets those losses with the relatively stable growth of its higher-margin advertising business.
Analysts expect Meta's GAAP earnings to grow 38% to $11.81 per share for the full year.
Snap, meanwhile, is still deeply unprofitable on a GAAP basis. It also turned unprofitable on a non-GAAP basis in the first half of 2023, but analysts expect it generate a non-GAAP profit of $0.06 for the full year -- which would still represent a 65% drop from 2022.
Snap's steep decline can be attributed to sluggish sales growth and increased investments in new Snapchat+, Spotlight, and AI-powered features.
The valuations and verdict
Meta trades at 25 times forward earnings and 6 times this year's sales. Snap trades at more than 170 times this year's adjusted earnings and 4 times this year's sales.
Meta's lower multiple, accelerating advertising growth, and clearer plans to counter TikTok and Apple's changes still make it a much better buy than Snap right now. Snap might not be doomed, but the company hasn't proven that it can break out of its rut.
