Social media companies are experiencing increased customer engagement since the pandemic as people are spending more time at their homes. However, these companies were under pressure as ad revenue took a hit due to business closures during lockdowns and challenging macro conditions. With the reopening of the economy, ad revenue recovered well in the third quarter.
Recent favorable updates by companies like Pfizer/BioNTech and Moderna about their COVID-19 vaccines have prompted concerns about whether social media companies like Snap, Facebook and Pinterest will continue to enjoy strong user growth. Using the TipRanks Stock Comparison tool, we will place Facebook and Pinterest alongside each other to see which stock offers investors a better growth opportunity.
Facebook (FB)
Facebook is a dominant social media player, with 2.5 billion people around the world using one or more of its apps (Facebook, Instagram, Messenger, WhatsApp) every day, over 200 million businesses utilizing its free tools and more than 10 million active advertisers across its services. The pandemic continued to add more users to the company’s platform as people looked for means to be entertained and stay connected.
Amid the lockdowns, Facebook’s advertising revenue was under pressure as macro uncertainty impacted several businesses. Also, major advertisers decided to boycott the company in July as they wanted the social media giant to take more stringent measures to halt the spread of hate speech and misinformation on its platform.
However, the boycott didn’t seem to have much impact and in fact, ad revenue picked up in 3Q, growing 22% year-over-year to $21.2 billion. Overall, Facebook’s 3Q revenue rose 22% to $21.5 billion and EPS increased about 28% to $2.71.
Also, Facebook had 2.74 billion Monthly Active Users (or MAUs) as of Sept. 30, reflecting a 12% year-over-year growth. If we include all other apps, the company had 3.21 billion Family Monthly Active People (or MAP) as of September end, implying a 14% rise. Another key metric, Average Revenue Per User or ARPU, was up 9% to $7.89.
However, investors were spooked as Facebook’s user base in the U.S. and Canada fell to 196 million daily active users in 3Q from 198 million in 2Q. The company said that its U.S. and Canada user base was elevated in 2Q due to the impact of the pandemic and cautioned that it expects its user base in these regions to remain flat or decrease in 4Q.
It also cautioned investors about certain headwinds in 2021, including the impact of a potential change in the accelerated e-commerce trend experienced during the pandemic on ad revenue, a change to Apple’s ad tracking technology in iOS 14 and “evolving regulatory landscape.”
Meanwhile, Facebook expects its 4Q ad revenue growth rate to be higher than 3Q due to advertiser demand in the holiday season. It is also optimistic about ‘Other Revenue’ growth thanks to the demand for Oculus Quest 2. Facebook is trying to grow its revenue base beyond advertising through products like Portal (a video communication device with Alexa built into it) and Oculus (a virtual reality headset). Facebook is teaming up with Luxottica, the maker of Ray-Ban and Oakley, to build its first smart glasses, which it expects to launch next year.
One of the key concerns about Facebook is the antitrust scrutiny. The U.S. Federal Trade Commission is expected to file a lawsuit against the company for using its market power in social networking to maintain a monopoly.
On Nov. 16, J.P. Morgan analyst Doug Anmuth reiterated a Buy rating on Facebook and increased the price target to $330 from $315 noting that the company stands to benefit from the rebound in online advertising. The analyst feels that despite the COVID-19 situation, the online advertising market appears on pace for continued acceleration through 4Q.
Looking at the decline in shares after the earnings release, Anmuth stated that the main issues like the revenue uncertainty and higher expense outlook for 2021 are more manageable than investors are anticipating. (See FB stock analysis on TipRanks)
Shares have advanced 32.5% so far this year. The average price target stands at $322.73, implying an upside potential of 18.7% in the months ahead. Facebook scores a Strong Buy analyst consensus based on 33 Buys versus 2 Holds.
Pinterest (PINS)
Pinterest is a social media platform that makes virtual recommendations, which the company calls Pins, to users based on their personal choices and interests. Users can then save these pins on virtual boards. About two-thirds of Pinterest’s users in 2019 were women. It also gives businesses the opportunity to showcase their products and services.
Like its social media peers, the company derives its revenue from advertisements. Pinterest’s revenue grew by an impressive 51% in 2019 to $1.14 billion, with Monthly Active Users (or MAUs) of 335 million. (See PINS stock analysis on TipRanks)
The company has been seeing strong user growth amid the pandemic and it delivered stellar 3Q results thanks to the recovery in ad demand. The Facebook ad boycott also worked in Pinterest’s favor. Additionally, the rapid shift to e-commerce is driving small and medium-sized advertisers to Pinterest.
Overall, revenue grew 58% year-over-year to $443 million in 3Q, with global MAUs rising 37% year-over-year to 442 million. Pinterest attributed the strong MAU growth in the U.S. as well as international markets to COVID lockdowns in many regions. The robust top line growth resulted in adjusted EPS of $0.13 in 3Q20, compared to $0.01 in 3Q19.
Looking ahead, Pinterest expects revenue growth of around 40% in 4Q. It sees international expansion to be a key growth driver. In 3Q, U.S. MAUs increased 13% year-over-year to 98 million while international MAUs surged 46% to 343 million. International ARPU is currently small and the company sees a huge opportunity to enhance it. In 3Q, U.S. ARPU rose 31% year-over-year to $3.85 while international ARPU increased 66% to $0.21.
To leverage the e-commerce boom, the company updated its Pinterest app on Shopify in May, adding a new option that will enable Shopify merchants to quickly upload their entire product catalog directly into “shoppable Pins.” Meanwhile, the company said that its investments in video are reaping rewards, with unique video uploads growing by seven times year-over-year in 3Q.
Following the recent results, Rosenblatt Securities analyst Mark Zgutowicz raised his price target to $55 from $40 and reiterated a Hold rating. In a research note to investors, the analyst stated, “Following Pinterest’s impressive 3Q ARPU inflection, we take CY20E revenue up from $1.49 billion to $1.63 billion, +43% year-over-year, and CY21E from $1.97 billion to $2.40 billion, +47% year-over-year; note easier ’21E COVID comparison.”
“The results emphasize a strong ecommerce/DR led ad recovery, topped off with brand reengagement in 3Q following a nearly six month hiatus. And importantly, the company successfully (and timely) transitioned its automated bidding platform to small businesses, which drove meaningful lift to 3Q results,” added Zgutowicz.
With shares exploding about 246% year-to-date, the average price target of $67.57 implies a modest upside potential of 4.8% in the coming 12 months. The Street is cautiously optimistic on Pinterest, with a Moderate Buy analyst consensus based on 13 Buys and 9 Holds.
Conclusion
Pinterest has strong growth prospects, especially in the international markets where it has tremendous opportunity to monetize its platform. However, given the staggering rise in the stock so far this year, the Street does not see much upside potential over the coming months. To summarize, higher growth potential in the stock and an extensive user base make Facebook a better pick right now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
