I compared two social media stocks — META and SNAP — and found that META stock is the better choice; I’ll explain why in this piece.
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The big story for social media in the last few quarters has been declining digital ad revenue, which is typically associated with a recession. However, some might be wondering if the recent sell-offs are buying opportunities.
Meta Platforms (NASDAQ:META), formerly known as Facebook, and Snapchat parent company Snap (NYSE:SNAP) both live and die on digital ad revenue. Thus, it’s no wonder investors became concerned, especially after Snap’s October earnings report, in which it blamed soaring inflation for its slowest revenue growth since its IPO five years ago. Both deserve a closer look now.
Meta Platforms (META)
Facebook parent Meta Platforms has long ruled the social media scene, but even it wasn’t immune from Snap’s inflation warning. Meta shares are down ~60% for the last 12 months after gaining 18% in the last month, suggesting that sentiment could be reversing. However, the company is taking a hit from more than just inflation and falling ad revenue, so a neutral view may be appropriate until things become clearer.
In the spotlight for Meta Platforms is tumbling ad spending. One forecast from Insider Intelligence suggests that U.S. digital ad spending will come in at around $278.6 billion, lower than the previous forecast of $284.1 billion. Apple’s (NASDAQ:AAPL) iOS update has also taken a bite out of digital advertising revenues, and Meta warned in early 2022 that it expected the app tracking changes to slice $10 billion off its bottom line for the year.
Meanwhile, TikTok has been undercutting its rivals with cheaper ads. Advertisers and brands told the Financial Times earlier this month that an increasing amount of digital ad spend is shifting away from Meta, YouTube, and Twitter.
A TikTok ban would be positive for Meta, but its other problems are too large a specter to ignore. CEO Mark Zuckerberg announced a refocus on the metaverse when Facebook was rebranded to Meta Platforms in late 2021.
As a result, the company is starting to look more like a rather risky startup, albeit a profitable one overall, when considering its core operations. However, Meta’s metaverse play, Reality Labs, lost over $9 billion in the first three quarters of 2022 alone, and it expects to lose even more in 2023. Meta is laying off 13% of its staff to cope with the mounting losses.
What is the Price Target for META Stock?
Meta Platforms has a Moderate Buy consensus rating based on 29 Buys, seven Holds, and three Sell ratings assigned over the last three months. At $147.74, the average price target for Meta Platforms stock implies upside potential of 8.1%.
Snap, Inc. (SNAP)
Five years after going public, Snap remains unprofitable on an annual basis, so investors should start asking if it can ever become profitable, especially amid slowing ad revenues. Thus, a bearish view seems appropriate.
In August, Snap announced plans to cut 20% of its workforce and halt side projects like gaming and its flying camera drone to protect against the weakening economy. Ending those side projects seems wise at such a time as this. Another bit of good news is that Apple’s iOS update didn’t appear to affect Snap as much as it affected Meta.
However, with $4.1 billion in revenue for 2021, Snap still lost $488 million. For the last 12 months, the company lost $1.1 billion on $4.6 billion in revenue, so there are no signs that profitability might come soon.
What is the Price Target for SNAP Stock?
Snap has a Hold consensus rating based on six Buys, 19 Holds, and two Sell ratings assigned over the last three months. At $10.27, the average price target for SNAP stock implies upside potential of 6.5%.
Conclusion: Neutral on META, Bearish on SNAP
With a trailing P/E ratio of 12.7x and a price-to-sales (P/S) ratio of 3.0x, Meta is selling at a discount relative to its past, as is Snap, with its P/S ratio of 3.4x. Meta certainly deserves a premium versus Snap in terms of its P/S multiple because it’s profitable, so the lack of a premium makes it look undervalued against Snap.
This is not the time to invest in unprofitable companies, as Wall Street has been punishing unprofitable names. Meanwhile, Meta Platforms looks too risky for a bullish view right now with how much it’s losing on the metaverse. Thus, a neutral view looks appropriate for Meta, pending a refocus on what’s important, and a bearish view looks correct for Snap.
