Meta Platforms, Inc. (NASDAQ : FB) fell 7% on May 24 due to updated advice from its peer and social media competitor, Snap Inc. (SNAP), the maker of the social media platform “Snapchat”. the The company warned that its revenue and EBITDA in the second quarter were down from target. The implication is that SNAP could highlight underlying weakness in the sector with meta-platform brands such as “Facebook” and “Instagram” likely facing similar trends. The narrative was enough for SNAP to crash over 40% and slide down the whole market with the NASDAQ-100 (QQQ) closing down 2% on the day.
That being said, we disagree with this assessment and consider the challenges Snap Inc faces to be perhaps based more on company-specific factors and not a true benchmark for all social media or technology in general. In other words, the sell-off in stocks that day due to SNAP was an overreaction.
We reaffirm a bullish call on FB, with the pullback representing a new buying opportunity. In many ways, any operational weakness at Snapchat can ultimately be positive for Facebook and Instagram if it means cementing its advertising market share and supporting increased user engagement. Meta Platforms is fundamentally sound and is currently trading at an attractive level, well positioned to bounce higher.
Why SNAP Crashed
SNAP last released its first-quarter results on April 21, which were mixed between a weaker-than-expected EPS loss of -$0.03 versus consensus at the time to a profit of $0.02. . On the other hand, Q1 revenue of $1.1 billion was up 38% year over year, in line with estimates. Daily active users reached 332 million, up 18% from Q1 2021. Similarly, average revenue per user (ARPU) increased 17% to $3.20, including a 31% increase in North America at $7.77.
The takeaway is that even with the strength of the top line benefiting from a larger user base, the company continues to struggle to generate consistent profitability. The decline in earnings this quarter reversed the trend of improving finances and rising margins the company had built over the past two years.
With the release of first quarter results, the company issued second quarter guidance for revenue growth of between 20% and 25%, with break-even adjusted EBITDA up to $50 million. Notably, this adjusted EBITDA target compares to $64 million in the first quarter and $117 million in the second quarter of last year. Again, no significant progress on the earnings side. This explains why the stock was already down more than 50% year-to-date even before the latest crash amid broader market volatility.
Fast forward to this week, and SNAP quietly filed a memo with the SEC explaining that the company now sees second-quarter revenue and adjusted EBITDA below the low end of the previously released guidance range. From Form 8-K:
Since we published our forecast on April 21, 2022, the macroeconomic environment has deteriorated further and faster than expected. As a result, we believe it is likely that we will report revenue and Adjusted EBITDA below the lower end of our guidance range for the second quarter of 2022. We remain excited about the long-term opportunity to grow our business.
To explain why SNAP fell 44% on the news, it’s important to recognize that such goal revisions less than a month since the last earnings report are rare for any company. The other option was to simply not make a statement leading to a big shortfall when the company releases final numbers. In this case, SNAP management believed that the deteriorating trends were significant enough to notify investors immediately.
Read between the lines
The market seems to have latched onto Snap Inc’s view that its outlook has deteriorated, which infers that advertisers are cutting back on spending on social media platforms. Naturally, if a company experiences such a drastic change in the operating environment, the headwinds must be widespread for everyone.
At the same time, we think there’s room for some skepticism here in asking how or why Snap Inc deserves such market-changing power. The connection between SNAP and other tech giants that collectively lost hundreds of billions of dollars in market value in the day’s sale is loose to say the least.
With all due respect, Snap Inc with 332 million users is significantly smaller than the Facebook platform which has 2.0 billion daily users. According to research from Adobe Inc (ADBE), Snapchat is only the 7e plus grand social media site in usa
It is difficult to separate macroeconomic trends from company-specific factors. One scenario that could explain the company’s slower growth would be users losing interest in the app and migrating to alternative sites. With revenue being the primary revenue driver, advertisers can choose to spend marketing dollars on other platforms like Instagram, Twitter Inc (TWTR), Alphabet Inc’s “YouTube” (GOOGL)(GOOG), or even ” TikTok” private.
Of course, it’s easier for Snap Inc to come out and blame the global economy as an excuse for the brand’s underlying weakness. A recent survey by investment bank Piper Sandler Co (PIPR) suggests that American teens now prefer TikTok on Snapchat who is the company’s main demographic. Notably, the same report indicates that Instagram is the leader in terms of engagement. Advertisers are well aware of these trends and are spending accordingly.
The point we are getting here is that drawing a conclusion about the operating environment for other companies like Meta Platforms based on the experience of a 2nd or even 3rd tier player is wrong and we feel the Market was reading too much into questionable Snap comments.
Why we love FB over SNAP
The appeal of Meta Platforms comes down to its global leadership across multiple applications. This is in contrast to Snap Inc which is all in its one Snapchat app. There is evidence that Instagram and Facebook are more monetizable with a diverse user base in terms of age groups where a greater variety of products and services can be advertised.
The reality is that Meta Platform, despite its own mixed results this year, has proven to be structurally profitable. We note that the company consistently generates higher margins as a measure of fundamental quality. Meta-platforms should be more resilient across different economic cycles given their large ecosystem.
Even with the SNAP stock price crashing, the stock is still trading at a significant premium to FB in terms of forward P/E ratio and forward EV to EBITDA. Note that it is likely that earnings estimates for SNAP will be revised lower over the next few days and weeks, meaning the valuation gap will widen further. By most measures, FB is a better investment with a combination of less volatile earnings and a more positive long-term outlook.
Finally, the other idea we offer is that if Snapchat is indeed losing advertisers due to poor engagement metrics, meta-platforms can become winners if they consolidate market share. The final Q2 figures will be an important test for this thesis.
The current market environment is challenging for all businesses. Historically high inflation, rising interest rates, a Fed tightening cycle and macroeconomic uncertainties are true headwinds that have defined risk aversion sentiment. Still, the main risk for FB being the doomsday scenario of an economic collapse or “hard landing” is far from certain.
With FB shares currently trading near $180 and more than 50% off their all-time high, the silver lining is the valuation reset that looks attractive. Against the backdrop of low expectations, FB is a good long-term bet that the company will remain a leader with innovations that will stay one step ahead. We are bullish on FB and expect it to outperform going forward as SNAP continues to struggle in an attempt to catch up.