Twitter, Inc. (TWTR) and Snap Inc. (SNAP) are two of the largest social media platforms. While staying at home amid the pandemic, people have been spending more time on social media. As a result, both TWTR and SNAP have been witnessing significant growth.
Both stocks have generated significant returns over the past three years. While TWTR returned 108.7% over this period, SNAP gained 212.8%. In terms of year-to-date performance, SNAP is a clear winner with 148.8% returns versus TWTR’s 35.2%. But which of these stocks is a better pick now? Let’s find out.
TWTR launched ‘Fleets’ this week. Unlike tweets, Fleets cannot be retweeted or shared, liked, or publicly commented on. It disappears after 24hours enabling the users to post spontaneously. It is aimed at increasing the time spent by the users on the platform. The company appointed ‘ethical’ hacker Peiter Zatko as the new head of security.
TWTR recently updated its account security. The company acquired Chroma Labs, a story template maker, earlier this year. The company also completed rebuilding its ad server this year to ensure faster product development.
Miquela, the virtual pop star and digital influencer launched a new Snapchat creator show called ‘Get real, Miquela’ on November 18th. It has 10 episodes which will be aired weekly on the platform through January 20th. SNAP is expected to acquire Voca.ai which builds AI-based voice assistants for customer support services.
In June, SNAP announced that Disney, ESPN, NBCUniversal, ViacomCBS, the NBA, and NFL expanded content partnerships to SNAP’s Discover platform. The company also introduced a new product called Happening Now, which has been watched by over 125 million people. SNAP announced new developer products and partnerships across Snap Kit, Snap Games, and Bitmoji ecosystems.
Recent Financial Results
TWTR’s revenue for the third quarter ended in September 2020 increased 13.7% year-over-year to $936 million primarily driven by greater investments from the advertisers.
The company’s revenue from advertising increased by nearly 15% year-over-year to $808 million. While US revenue increased 10% year-over-year to $513 million, international revenue increased 18% to $424 million. The Average Monetizable Daily Active Usage (mDAU) increased by 29% year-over-year to 187 million.
SNAP’s revenue for the third quarter ended September 2020 increased 52% year-over-year to $679 million. The daily active users (DAUs) increased by 18% year-over-year to 249 million. While the total daily time spent watching shows increased by more than 50% year-over-year, the average revenue per user also increased by 28% year-over-year to $2.73. The company’s adjusted gross margin improved to 58% year-over-year.
Past and Expected Financial Performance
TWTR’s revenue grew at a CAGR of 12.2% over the past 3 years. The market expects the company’s revenue to increase by 16.2% in the fourth quarter ending December 2020, 4.4% in the current year, and 21.6% next year. TWTR’s EPS is expected to grow 16% for the quarter ending December 2020 and 225.7% next year.
On the other hand, SNAP’s revenue grew at a CAGR of 45.2% over the past 3 years. The market expects SNAP’s revenue to increase by 50.9% in the fourth quarter ending December 2020, 42% in the current year, and 40.7% next year. The company’s EPS is expected to grow 133.3% in the fourth quarter ending December and 344.4% next year.
Thus, SNAP has an edge over TWTR here.
TWTR’s trailing-12-month revenue is 1.59 times what SNAP generates. Moreover, TWTR is more profitable with a gross margin of 63.7% versus SNAP’s 51.3%.
However, SNAP’s leverage free cash flow margin of 12.5% compares favorably with TWTR’s 9.7%.
In terms of trailing 12-month price/sales, SNAP is currently trading at 27.07x, significantly more expensive than TWTR which is currently trading at 9.88x. Moreover, SNAP is more expensive in terms of EV/Sales (27.73x versus 9.04x).
In terms of trailing-12-month price-to-book as well, SNAP is trading higher than TWTR (SNAP’s 27.44x versus TWTR’s 4.40x).
Though SNAP looks much more expensive compared to TWTR, it’s worth paying this premium considering SNAP’s significantly higher earnings growth potential.
While TWTR is rated “Neutral” in our proprietary POWR Ratings system, SNAP is rated “Buy”. Here’s how the four components of overall POWR Rating are graded for both these stocks:
TWTR has a “B” for Trade Grade, a “C” for Buy & Hold Grade and Peer Grade, and an “A” for Industry Rank. It is currently ranked #21 out of 58 stocks in the Internet industry.
SNAP holds an “A” for Trade Grade and Industry Rank, and a “B” for Buy & Hold Grade and Peer Grade. It is currently ranked #9 in the same industry.
Both TWTR and SNAP are good investment bets considering their market dominance. However, SNAP appears to be a better buy despite trading at a marginally higher valuation based on its higher earnings growth potential, innovative features, and continued expansion.
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TWTR shares were trading at $43.43 per share on Thursday afternoon, up $0.10 (+0.23%). Year-to-date, TWTR has gained 35.51%, versus a 12.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...
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