Oh Snap! Social media stocks again
As though the market was not bearish enough, Snap announced it was likely to miss its 2Q2022 revenue guidance out of a sudden.
The announcement sent Snap's share price down 43% in a day. It is now trading 25% below its IPO price, but still higher than the Covid low.
Snap wasn't selfish, it dragged down other social media stocks too. Misery loves company.
Social media share price 1-day % change:
Alphabet -5%
Twitter -6%
Yelp -6%
Meta Platforms -8%
Roblox -10%
Pinterest -24%
The big question is - are these stocks good buys now?
Let's look at their P/S ratios vs their 5-year averages:
Yelp: 2.1x vs 3.2x (-34%)
Meta: 4.6x vs 10x (-54%)
Alphabet: 5.6x vs 6.7x (-16%)
Twitter: 5.7x vs 8.7x (-34%)
Snap: 8.1x vs 20.7x (-61%)
Roblox: 8.4x
All are trading below their 5-year averages with Meta and Snap having the steepest discounts. But we have compare other things such as market share, growth rates and prospects to account for the differences.
Based on monthly active users, Meta has 4.4 billion (both Facebook and Instagram) while Youtube is second with 2.6 billion. They should command a premium.
In terms of the 1y revenue growth rates in the recent quarter,
Roblox +39%
Snap +38%
Alphabet +23%
Yelp +19%
Twitter +16%
Meta +7%
Now it makes more sense why Snap and Roblox are trading at highest PS because they have the highest growth rates.
Incumbents are powerful as they have economies of scale and newcomers are hard to capture users because of the powerful network effect in existing platforms.
The newcomers have to capture new generation of users instead. Snap gets the Gen Z while Roblox went for kids. And having fast growth rates is a sign of adoption and worth some premium even if they are still relatively small networks.
Thus, the worthy social media platforms to look at are Meta and Alphabet as they have big market share or the smaller but fast growing ones like Snap and Roblox. Twitter and Yelp are in no man's land - neither big nor fast-growing.
Adding in the valuation consideration mentioned previously, we can narrow down the selection to just Meta and Snap.
The last part of the analysis is to look forward. No one knows the future and hence this is where judgement becomes valuable (and a good dose of luck).
Their biggest problem is TikTok. It has been wildly successful and has since hit 1 billion monthly active users, more than Snap (557 million). And they target Gen Z at the same time. It is likely Snap has already lost the race.
So we are left with Meta which still captures the Gen X and Gen Y (with FB and IG). That said, the average monthly hours spent on Facebook and IG were a combined of 23.9 hours, which is lower than TikTok's 25.7 hours. Increased engagement may suggest the content is more addictive and TikTok may be able to steal users from Meta. This is still an unknown.
Meta's spending of billions in the metaverse pursuit is a big question mark too. But all in all, Meta is still the best social media bet right now, if your view is that it will survive TikTok's challenge and remain a dominant social media in the future.
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Great news!