In this article, I’ll delve deeper to explain why I have a neutral stance on Snap (NYSE:SNAP) and a bullish outlook on Pinterest (NYSE:PINS). Within the social media sphere, Snap and Pinterest stand out as two companies with distinct positioning and strategies, yet both have demonstrated robust growth in user bases and revenues in recent years. Despite both stocks enjoying strong share performance over the past 12 months, PINS appears to be better positioned, in my view.
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Snap (NYSE:SNAP)
The Santa Monica, California-based Snap Inc. is the developer of the Snapchat platform, a social media platform known for its predominantly young audience, with nine out of 10 teenagers and young adults between the ages of 13 and 24 using the platform. Ads constitute Snap’s primary source of revenue, with the company monetizing users through advertising. Additionally, Snap generates revenue from its hardware device, Spectacles, and offers a premium subscription model called Snapchat+, providing users with additional features.
When examining the price chart for SNAP stock over the past six years, one might question why the company experienced significant growth in 2020 and a substantial decline since 2021 (down more than 80% from its peak).
The stock surged from $17 per share at its IPO in 2017 to its all-time high of $83 in September 2021. This remarkable increase was propelled by the company’s exceptional financial performance in its initial years as a publicly traded company, coupled with a strong bull market in that period. In 2021, Snap reported revenues of $4.1 billion compared to $850 million during its IPO year, achieving profitability for the first time in the first quarter of 2022.
Despite the impressive financial metrics and robust growth in daily active users (DAUs) during this relatively fast period, the euphoria surrounding SNAP stock led to it being traded at a market value exceeding $130 billion despite generating just over $4 billion in annual revenues and not yet turning a yearly profit.
However, in 2022, amid adverse market conditions characterized by high inflation and rising interest rates, many tech and growth stocks, including Snap, experienced a significant downturn. Snap also faced challenges such as declining ad spending, resulting in stock price volatility after earnings reports.
While Snap’s performance over the last 12 months has shown gains of around 45%, the company continues to face volatility. This is evidenced by the mixed reactions to its Q4-2023 and Q1-2024 earnings reports, as depicted by the sharp decline and sharp rebound in the chart below.
While Snap experienced a strong negative reaction in Q4 after reporting modest revenue growth and failing to meet market expectations, the company rebounded in Q1 by surpassing revenue expectations. Revenue grew by 21% year-over-year, and daily active user (DAU) numbers increased by 10% year-over-year. Additionally, other metrics, such as the number of Snapchat+ subscribers, more than tripled to over nine million subscribers in Q1 compared to the previous year.
Another point of concern is that much of Snap’s growth trajectory has been financed through leverage, even though it paid down about $440 million in the past 12 months. Currently, the company’s balance sheet carries a substantial amount of total debt of $3.89 billion despite its ability to generate significant free cash flow. In 2023, Snap had a 70% debt-to-assets ratio, which is the highest in history and significantly higher than that of its peers, especially Pinterest.
Looking ahead, I believe Snap is well-positioned for a more consistent trajectory, unlike its tumultuous past. The company stands to benefit from increased ad spending as the economy enters a higher growth phase. However, concerns remain regarding Snap’s valuation, with the company trading at a forward EV/EBITDA ratio of 57.8x, well above the industry average of 7x, and an EV/sales ratio of 5x, well above the 1.2x industry average.
Given these circumstances, a stretched valuation is the primary reason why Morgan Stanley (NYSE:MS) analyst Brian Nowak has a bearish stance on Snap. Despite the company’s strong performance in the recent quarter, characterized by significant improvements in purchase conversions from brand advertising, Nowak advises caution. He suggests that investors should refrain from overreacting to the beat in Q1 or the revenue guidance for Q2, which implies a modest 1% year-over-year increase.
Is SNAP Stock a Buy, According to Analysts?
Taking into account Nowak’s bearish stance, along with assessments from other Wall Street analysts, the consensus rating on SNAP is Hold. The stock has eight Buys, 18 Holds, and two Sell ratings. The average SNAP stock price target stands at $15.59, suggesting modest upside potential of 2.6%.
Pinterest (NYSE:PINS)
The San Francisco-based social media company Pinterest focuses on a different target audience compared to Snap. Its core demographic consists of women with purchasing power, although the platform has been working to expand its user base and enhance its advertising capabilities. Additionally, Pinterest emphasizes shoppable features like direct links and advanced ad measurement tools.
The company primarily generates revenue through advertising, offering various ad formats such as Promoted Pins and Shopping Ads and enabling businesses to reach relevant audiences on the platform. Pinterest also features a “buy it” button, allowing users to purchase pinned products directly, potentially generating revenue through commissions from partner merchants, such as Amazon (NASDAQ:AMZN).
When it comes to the company’s stock performance, PINS’ performance over the past four years has followed a comparable trajectory to SNAP. The stock experienced a significant rise in 2020, reaching an all-time high of $89 in February 2021, driven by strong financial performance and user growth. However, the market downturn in 2022 led to a drawdown of almost 80%.
In the last two years, Pinterest shares have performed well, rising nearly 100%, with the company focusing on cost control and improving its bottom-line losses. Pinterest boasts a strong financial position, with low debt levels and rising free cash flow compared to peers, including Snap. Its debt-to-free-cash-flow ratio stands at 0.7x, and in 2023, the company’s debt-to-assets ratio was 14%. This positions Pinterest for greater revenue growth and user acquisition.
Looking ahead, Pinterest’s partnership with Amazon and its focus on shoppability and full-funnel advertising can be seen as growth catalysts. For the full year 2024, revenue growth is expected to reach 15%. Despite trading at a forward EV/EBITDA of 26.4x, which is stretched compared to the industry average, it is nearly half that of Snap. On the other hand, the company seems overvalued based on the EV/sales metric, as Pinterest trades at 8x sales compared to Snap’s 5x multiple.
Other important points supporting the potential for growth and appreciation in Pinterest’s shares include key factors cited by BMO Capital analyst Brian J. Pitz, who is one of the Pinterest bulls. These factors include the improvement of the platform’s international monetization through a partnership with Google Ads Manager and greater small-business adoption with new product launches (including generative AI features). Additionally, management aims to increase revenues in the mid-teens over the next three to five years.
Is PINS Stock a Buy, According to Analysts?
Currently, the consensus among Wall Street analysts is that PINS stock is a Moderate Buy based on 15 Buys and six Holds assigned in the past three months. The average PINS stock price target is $46.28, implying upside potential of 8.3%.
The Verdict: Neutral on SNAP, Bullish on PINS
I’m leaning towards Pinterest having stronger fundamentals than Snap right now. Pinterest seems to have less to prove, even though its valuation is far from a bargain. The premium EV/sales multiple is more justified based on the better quality of its fundamentals.
While both companies are well-positioned for growth and likely to be long-term winners, I see Snap’s performance as highly susceptible to inconsistency. This stems from its struggle to turn a profit and potentially stretched valuation multiple, leading to negative reactions.
