Shares of social media companies Twitter (TWTR) and Snap Inc. (SNAP) have grossly underperformed the markets in 2021. While the Twitter stock is down 24% year to date, Snap has declined by over 6%.

However, given the massive traction these two companies enjoy, the ongoing pullback also provides investors an opportunity to buy the dip.

Let’s see which between Twitter and Snap have the potential to outpace indexes and peers going forward. Here, we analyze the long-term drivers and trends that may impact the performance of the social media giants in the next year and beyond.

The bull case for Twitter

Twitter stock was extremely volatile this week after Jack Dorsey, the company’s CEO, abruptly announced his resignation. Dorsey will be succeeded by Parag Agarwal who was previously the COO of Twitter. Shares of Twitter initially rose by more than 10% on November 29 before falling significantly to end the day lower by 3%.

Similar to most social media companies, Twitter generates a sizable portion of its revenue from advertisements. Last year, ad spending was impacted negatively amid the COVID-19 pandemic which meant Twitter sales could rise by just 7% year over year to $5.2 billion. However, top-line growth accelerated this year as Twitter sales rose by 46% in the first nine months of 2021.

Twitter is a popular platform used by celebrities as well as governments and policy makers to connect with their followers. The company’s robust algorithms aim to create a personalized experience for users by populating their Twitter feed with appropriate content. It also provides enterprises with the required insights to create and implement targeted digital ad campaigns.

Twitter ended Q3 with 211 million daily active users, an increase of 13% year over year. The company has estimated its total addressable market at $150 billion, providing it with enough room given sales in 2023 are forecast to touch $7.5 billion by 2023.

The bull case for Snap stock

Snap stock lost significant momentum after its less than impressive Q3 results. The company reported revenue of $1.07 billion and adjusted earnings of $0.17 per share. Comparatively, Wall Street forecast sales at $1.1 billion and earnings at $0.08 per share. It forecast sales between $1.17 billion and $1.21 billion in Q4, lower than estimates of $1.36 billion.

Despite its revenue miss, investors should note that daily active users rose by 23% year over year to 306 million and average revenue per user increased by 28% to $3.49. Snap, in fact, grew its top-line by 57% in Q3 which is quite impressive.

Snap is gaining traction in international markets as daily active users soared by 49% to 130 million in these regions.

The verdict

Snap and Twitter continue to grow at a solid pace. Given their revenue estimates, Snap stock is valued at a forward price to 2022 sales multiple of 13.6x while this ratio for Twitter is much lower at 5.6x. However, Snap is also growing at a far higher pace.

For example, Snap is forecast to increase sales by 60% in 2021 and 39% in 2022. Comparatively. Twitter sales are estimated to rise by 37% in 2021 and 21% in 2022.

Right now, I believe Snap is the better investment, as it is expected to outpace Twitter in the next year given its robust growth forecasts, rising user base, and widening profit margins.

TWTR shares were trading at $41.56 per share on Friday morning, down $1.09 (-2.56%). Year-to-date, TWTR has declined -23.25%, versus a 23.21% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditya Raghunath

Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...

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