Meta Platforms (META 0.43%) and Snap (SNAP 27.63%) represent two different ways to invest in the massive social media market. Meta -- which owns Facebook, Messenger, Instagram, and WhatsApp -- is the world's largest social media company with 3.14 billion people accessing at least one of those apps daily. Snap owns Snapchat, which reached 406 million daily active users (DAUs) in its latest quarter.
Snap was once considered a serious threat to Meta as it siphoned away younger users from Facebook and Instagram, but its growth stalled out over the past year. As a result, Snap's stock dipped 3% over the past 12 months as Meta's stock more than doubled.
Should investors stick with the market leader or take a chance on the out-of-favor underdog? Let's review their growth rates and valuations to decide.
Image source: Getty Images.
Meta's revenue growth is accelerating again
Meta's ad revenue, which accounted for 98% of its top line in the first nine months of 2023, finally rose year over year again in the first quarter of 2023 and ended a three-quarter streak of declining revenues. The segment's revenue growth then accelerated again in the second and third quarters.
Last year, Meta suffered a slowdown as Apple's privacy changes on iOS disrupted its targeted ads, ByteDance's TikTok lured away its younger users with short videos, and the macro headwinds drove many companies to rein in their advertising budgets. But those headwinds dissipated this year as Meta tweaked its ad products to counter Apple's changes, expanded Reels to challenge TikTok, and profited from Chinese e-commerce and gaming companies ramping up their ad campaigns across its platforms to reach more overseas customers. A higher number of ad impressions also easily offset its declining average prices per ad.
As Meta's core advertising engine roared back to life, its higher-margin ad revenue offset the ongoing losses at its Reality Labs segment, which continues to burn billions of dollars each quarter to produce its virtual reality and augmented reality devices. Meta's total operating margin notably hit a two-year high last quarter, which suggests it can continue to maintain that delicate balancing act between its profits and investments for the foreseeable future.
Analysts expect Meta's revenue and earnings to rise 7% and 47%, respectively, for the full year. For 2024, they expect its revenue and earnings to increase another 13% and 24%, respectively, as the macro environment stabilizes. Those are impressive growth rates for a stock that trades at just 17 times forward earnings.
Snap faces a tougher recovery
Snap faced many of the same challenges as Meta last year in regards to Apple, TikTok, and the broader advertising market. Like Meta, Snap tweaked its ad products to rely more on first-party data to counter Apple's changes, but its short video platform Spotlight seemingly struggled to stay relevant against TikTok and Reels. And unlike Meta, Snap didn't experience a major influx in spending from Chinese advertisers.
Snap's revenue finally grew year over year again in the third quarter of 2023 after suffering two consecutive quarters of declines. But its revenue only rose 5% as Meta's revenue grew 23% during the same period.
Snap's recovery was hampered by its slow DAU growth in North America, which drove it to rely more heavily on Europe and the rest of the world for new DAUs. But it still generates much lower average revenue per user (ARPU) from its overseas DAUs -- and that growing mix of lower-revenue users is throttling its total sales growth.
To monetize its users more aggressively, Snap has been rolling out new ad products that enable advertisers to reserve the first story, lens, or ad they see each day. It's also expanding its Snapchat+ subscription platform, which reached 5 million subscribers in its latest quarter, and adding more features to its My AI chatbot.
Snap is expanding its ecosystem, but it still hasn't figured out how to achieve profitability on a generally accepted accounting principles (GAAP) basis and remains barely profitable on a non-GAAP basis. Analysts expect its revenue and non-GAAP EPS to decline 2% and 94%, respectively, for the current year. For 2024, they expect its revenue to grow 14% as its non-GAAP EPS rises sixfold -- but its stock still looks pricey at 155 times that estimate.
The obvious winner: Meta
It's easy to see why Meta outperformed Snap by such a wide margin over the past year. It's growing faster, it's better diversified, it's more profitable, and its stock is cheaper. Those four strengths should also make it a better play on the social networking market for the foreseeable future.
