Better Social Media Stocks: Meta Platforms vs. Snap

Shares Meta Platforms (FINISH 3.86%) AND Snap (SNAP -0.80%) went in opposite directions after the latest earnings reports. Meta shares rose 5% on Aug. 1 after the second-quarter report easily topped analyst estimates on the top and bottom lines. Snap shares fell 16% the same day as fourth-quarter revenue landed below analyst expectations and adjusted earnings only just met consensus forecasts.

Meta stock has risen nearly 40% over the past three years, while Snap’s stock has fallen more than 80%. Will the social media leader continue to nip at the heels of struggling outsiders?

Which company is gaining more users?

Meta is the world’s largest social media company. It ended Q2 2024 with 3.27 billion daily active users (DAP) across its “family” of apps (Facebook, Instagram, Messenger, and WhatsApp), up 7% year over year.

Snap has carved out a niche for itself among younger users with its instant messaging and augmented reality filters. Total daily active users (DAUs) grew 9% year over year to 432 million in Q2 2024.

Meta’s DAP growth has remained remarkably stable over the past year — but Snap’s DAU growth has slowed, falling to single digits in the last quarter. At this rate, Snap could end up growing its daily audience at a slower pace than Meta.

Data source: quarterly earnings reports. YOY = year-over-year.

Which company is seeing greater revenue growth?

Meta and Snap generate the majority of their revenue from advertising. However, over the past year, Meta has grown its revenue at a much faster rate than Snap, even though it has been gaining daily active users on its apps at a slower pace than Snapchat.

Data source: quarterly revenue reports.

For the third quarter, Meta expects revenue to grow 13% to 20% year over year, while Snap predicts growth of 12% to 16%. That’s usually a red flag when a weaker entity is growing slower than the market leader.

Meta’s platform is growing faster than Snap as it attracts more spending from Chinese e-commerce and gaming companies (which target foreign consumers) while also increasing ad prices and ad views, expanding its short-form Reels platform to counter TikTok, and collecting more first-party data through AI-powered algorithms to counter AppleRevolutionary changes to privacy on iOS.

Snap hasn’t captured the same interest from Chinese advertisers, its Spotlight video platform hasn’t gained much traction compared with Reels and TikTok, and ad rates have fallen even as total ad impressions have increased. Snap also relies too heavily on its international users — who generate a fraction of the ad revenue of North American users — to drive DAU growth.

Which company is more profitable?

Meta has been consistently profitable on a generally accepted accounting basis (GAAP), even though it has been funding the expansion of its unprofitable Reality Labs division (which makes VR and AR devices) with higher-margin advertising revenue. Snap remains unprofitable on a GAAP basis and is expected to remain in the red for the foreseeable future.

Data Source: Quarterly Earnings Reports. Based on GAAP principles.

For the full year, analysts expect Meta’s operating margin to improve 4 percentage points to 39%, while Snap’s operating margin will improve by about 12 percentage points to minus 18%. That would be a step in the right direction for Snap, but the company is still investing a lot of cash in share buybacks to offset dilution from stock-based compensation. That doesn’t look good for an unprofitable company with negative cash flow.

Snap’s outstanding shares have increased by 18% over the past five years. Meta, which launched a $50 billion share buyback plan earlier this year, has reduced its outstanding shares by 11% over the same period.

Valuations and Verdict

Meta is valued at 25 times future earnings, making it the second cheapest stock in the Magnificent Seven after Alphabet. Snap can’t be valued based on GAAP earnings, but its shares are valued at 58 times forward non-GAAP earnings — which excludes stock-based compensation and other one-time expenses.

The choice between Meta and Snap is simple. Would you rather invest in the world’s largest social media company, which is still growing despite already serving about 40% of the world’s population, or a niche outsider that’s trying to keep up with its nimbler competitors while burning through tens of millions of dollars each quarter? Meta stock is also cheaper relative to its growth potential — so it should easily outpace Snap for the foreseeable future.

Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board. Suzanne Frey, CEO of Alphabet, is a member of The Motley Fool’s board. Leo Sun holds positions in Apple and Meta Platforms. The Motley Fool holds positions in and recommends Alphabet, Apple, and Meta Platforms. The Motley Fool has a disclosure policy.