Most tech stocks have benefited significantly this year because the coronavirus pandemic turned into a blessing in disguise for them. Notably, social media buzz  began in mid-January 2020 with initial news of an outbreak of a novel coronavirus in China. With public gatherings coming to a halt, people started spending more time online, seeking out new ways to connect and share their ideas. As a result, social media companies have  benefited with increased traffic and ads on their platforms. This is evidenced by the Global X Social Media Index ETF’s (SOCL) 71.5% returns over the past year.

We think companies such as Snap Inc. (SNAP) and Pinterest, Inc. (PINS) are well positioned to soar in the upcoming months based on their ability to keep attracting more users.

Conversely,  giants in this space – such as Facebook, Inc. (FB) and Twitter, Inc. (TWTR) – are currently under strict regulatory supervision for their monopolistic behavior. Also, these companies are trading at sky-high valuations. So, it would be wise to avoid them for now.

Stocks to Buy:

Snap Inc. (SNAP)

SNAP is a camera company that  helps people communicate through short videos and images known as a Snap under its flagship product, Snapchat. This camera application offers a range of creative tools that enables people to personalize and add content to their Snaps. The Company’s advertising products include Snap Ads and Sponsored Creative Tools, such as Sponsored Lenses and Sponsored Geofilters.

Later in November, SNAP launched a new entertainment platform for user-generated content within Snapchat under the name Spotlight. This application will give Snapchatters an opportunity to share their creations broadly. As it will gather the most entertaining Snaps from the Snapchat community  in one place, which will  be tailored to each Snapchatter over time based on their preferences and favorites.

SNAP’s Daily Active Users (DAU) have increased 18% year-over-year to 249 million in the third quarter ended September 30, 2020. Its revenue has increased 52.1% from the year-ago value to $678.67 million over the same period, while average revenue per user of $2.73 has increased 28% year-over-year. Its non-GAAP EPS has improved 125% to $0.01.

Analysts expect SNAP’s revenues to grow 51.7% year-over-year to $850.63 million in the fourth quarter (ended December 31, 2020). The consensus EPS estimate of $0.07 for the about-to-be-reported quarter indicates a 133.3% improvement. The stock has gained 176.6% over the past year.

How does SNAP stack up for the POWR Ratings?

A for Trade Grade

B for Buy & Hold Grade

B for Peer Grade

B for Industry Rank

B for Overall POWR Rating

The stock is also ranked #15 of 69 stocks in the Internet industry.

Pinterest, Inc. (PINS)

PINS is a visual discovery engine platform that enables users to create and manage theme-based image collections and share inspirations for their lives. The platform acts like a virtual Pinboard, where people use pins to share their weddings, home decorating ideas, travel destinations and save images and videos on the Web. It offers online marketing services to brands by allowing them to connect with people based on their shared tastes and interests.

On October 26, PINS launched the Pinterest widget for iOS 14 that allows Pinners to feature a board of their own  from their iPhone home screen. The company also integrated with Microsoft Edge so that users can find relevant pins more easily and even export them to their profile.

PINS Global Monthly Active Users (MAUs) have increased 37% year-over-year to 442 million in the third quarter ended September 30, 2020. Its revenue has increased 58.2% from the year-ago value to $442.62 million over the same period, while non-GAAP EPS improved 1200% year-over-year to $0.13.

Analysts expect PIN’s revenues to grow 60.8% year-over-year to $643.20 million in the fourth quarter (ended December 31, 2020). The consensus EPS estimate of $0.32 for the about-to-be-reported quarter indicates a 166.7% improvement. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of the trailing four quarters. The stock has gained 220.5% over the past year.

It is no surprise that PINS is rated “Buy” in our proprietary POWR Ratings system, with an “A” for Trade Grade and a “B” for Buy & Hold Grade, Peer Grade, and Industry Rank.

Stocks to Avoid:

Facebook, Inc. (FB)

FB empowers more than 3 billion people around the world to share ideas, offer support and make a difference. The company has been constantly innovating , solving problems, and working to connect people all over the world. The Company’s products include Facebook, Instagram, Messenger, WhatsApp, and Oculus.

In terms of trailing-12-month non-GAAP P/E, the stock is currently trading at 29.68x, 71.4% higher than the industry average of 17.31x.

FB has recently come under fire, with advertisers boycotting its platform amid concerns over hate speech and misinformation. The company is in  talks with various stakeholders to resolve the issue.

FB has announced its plan to change Whatsapp’s privacy policy this month, wherein FB will collect data from Whatsapp. According to this policy, if someone uses WhatsApp for a business and has a list of clients, the business on the other side  will see the conversation and know their preferences. This could be used to show ads on Facebook platforms. FB has been largely criticized for this policy and many are boycotting its platform.

FB reported an operating margin of 37% in the third quarter ended September 30, 2020, down 400 basis points compared to the year-ago value. Its free cash flow has decreased 12.7% year-over-year to $13.81 billion for the nine-month period ended September 2020.

The stock has gained 13.7% over the past year but is currently trading below its 50-day and 200-day moving averages of $271.60 and $265.27, respectively, indicating that the stock is in a downtrend.

FB has an overall rating of “Neutral” in the POWR Ratings. The stock has a “C” for Trade Grade and Buy & Hold grade and a “D” for Peer Grade. Among the 69 stocks in the same industry, it is ranked #34.

Twitter, Inc. (TWTR)

TWTR, as the company name suggests, is about what’s happening and what people are talking about real time. It is a microblogging and social networking platform wherein users can interact with each other for self-expression through ‘tweets’ in real time. The Company’s products and services include Twitter, Periscope, Promoted Tweets, Promoted Accounts and Promoted Trends.

In terms of trailing-12-month Price/Sales, the stock is currently trading at 10.45x, 545.7% higher than the industry average of 1.62x.

TWTR has selected Amazon Web Services, Inc. as its strategic partner last month under a multi-year deal to use AWS’ global cloud infrastructure to deliver Twitter timelines. This expansion onto AWS’ proven cloud infrastructure will enable TWTR to scale its r real-time service and deliver seamless customer experiences quickly and cost-effectively.

TWTR’s net income has decreased 37.9% year over year to $47.76 million in the third quarter ended September 30, 2020. Its adjusted free cash flow has decreased 144.5% from the year-ago value to a negative $74.05 million over the same period.

The stock has gained 36% over the past year but is currently trading 19.5% below its 52-week high of $56.11.

TWTR’s POWR Ratings reflect this unfavorable outlook. It has an overall rating of “neutral” with a “C” for Trade Grade and Buy & Hold Grade; and a “D” for Peer Grade. Among the 69 stocks of the same industry, it is ranked #36.

More Great Investing Ideas?

9 “MUST OWN” Growth Stocks for 2021

How to Outperform the Stock Market?

7 Best ETFs for the NEXT Bull Market

5 WINNING Stocks Chart Patterns

SNAP shares rose $0.08 (+0.16%) in after-hours trading Tuesday. Year-to-date, SNAP has gained 0.64%, versus a 1.28% rise in the benchmark S&P 500 index during the same period.

About the Author: Rishab Dugar

Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...

More Resources for the Stocks in this Article