Are Hard-Hit Social-Media Stocks a Buy for Investors?
Meta, Twitter, Pinterest, and Snap are all deep in undervalued territory.
This article has been updated to reflect commentary on Pinterest and Snap fourth-quarter earnings reports.
Meta Platform’s (FB) mixed earnings results and stock slide is pulling down other social-media shares, and in the process pushing them further into undervalued territory.
Twitter (TWTR), Snap (SNAP), and Pinterest (PINS) eac took a hit Thursday along with a more than 25% dive in Meta, Facebook’s parent company. (Snap rebounded in after-hours trading following its earnings report.)
However, these social-media stocks are also deeply undervalued by Morningstar’s valuation metrics. Even before Thursday's sell off, Snap and Pinterest were in 5-star territory, the level considered the most undervalued in our Morningstar Ratings for stocks.
The revenue headwinds facing social-media stocks are most likely short-term, says Morningstar senior equity analyst Ali Mogharabi. “With that, their top-line growth will still be impressive (mainly PINS and SNAP).”
“FB is of course maturing and with already billions of users, a much higher rev growth deceleration is expected,” he says. “Even with margin pressure as it invests in new products (metaverse, etc.), 30% to 35% operating margin is impressive. And I think those margins can expand in 2023 when higher demand for ads in Reels drive up ad prices (as mentioned in the note), either stopping or maybe even reversing the slowdown in ad rev growth, which will also help margins.”
Here are some highlights from Mogharabi’s recent commentary on Twitter, Snap, and Pinterest. Mogharabi’s note on Meta can be found here.
“Twitter has captured the attention of nearly 200 million daily active users, including prominent celebrities and public figures worldwide. Its access to, and interactions around, real-time information and content create value for its users and for advertisers. While Twitter user growth has accelerated since 2018, a potential slowdown remains a concern. Slower user growth could make higher user monetization more difficult as advertisers may allocate a bit more toward other platforms such as Snap, which has a faster-growing user base. We do not believe that Twitter has carved out an economic moat.
While Twitter remains one of the main real-time online content distribution platforms, its user base is smaller than other social networks such as Facebook (including Instagram) and Snap’s Snapchat. As such, Twitter is not benefiting from increased spending on mobile and online video advertising as much as its peers.
Our fair value estimate is $58 per share, equivalent to 2021 enterprise value/adjusted EBITDA and enterprise value/sales ratios of 27 and 8, respectively. The ad market appears to have rebounded from the pandemic faster than we had expected, though we expect Twitter will continue to lag its peers in attracting direct response ad dollars. Top-of-the-funnel ad campaigns should continue to help, though, especially as live events such as sports return. We project modest growth in Twitter’s user base, due to the established presence of larger social networks such as Meta and Instagram and faster-growing ones such as Snapchat and Pinterest. As engagement improves, we think Twitter will be able to attract its fair share of ad dollars.”
“Snapchat, which has captured 265 million users to date, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect among its customer base and is starting to attract the attention (and dollars) of advertisers with a growth trajectory toward nearly $3.8 billion in revenue. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade. Ultimately, Snap's competition, which includes wide-moat Facebook with 2.8 billion users, is overwhelming, in our view. In particular, Instagram, owned by Facebook, may emerge as a substitute for Snapchat. The larger ecosystems of Snap’s competitors may have also created somewhat of an exit barrier for their users, which we think could further limit the growth acceleration of Snapchat users. In addition, growth in new users, user engagement, and time spent on Snapchat may face a natural limit in the long run as customers only have so much time to give to various mobile app interactions each day. TikTok, a video-sharing firm with China’s ByteDance as its parent company, is another formidable competitor of Snap.
While the impact of Apple’s changes had an unanticipated impact in the third quarter, they were partially offset by improvements in direct response advertising in the fourth quarter, which was not affected by these changes as much as forecast. We believe the firm will continue to adapt to these changes. In addition, although management pointed out labor and supply shortages will continue to linger throughout 2022, they added that the shortages will mainly only impact their restaurant and consumer packaged goods clients.”
“Pinterest, an online product and idea discovery company, is focused on carving out a piece of the global digital advertising space. While we don't expect Pinterest to displace online advertising behemoths Google and Meta or up-and-coming Amazon, we do expect it to attract a small pinch of digital ad spending, which we estimate is an addressable market of more than $600 billion.
Pinterest has a narrow economic moat and stable moat trend based on network effects and intangible assets (data), which we think can eventually drive the company to profitability and excess returns on invested capital. With more than 475 million average monthly users who access Pinterest with the intention of not only discovering ideas or products but also purchasing them immediately or in the future, we think the firm can attract more online ad dollars.
Pinterest posted strong fourth-quarter 2021 results which exceeded consensus estimates on the top and bottom line. While the firm’s monthly active user count declined, this impact was more than offset by higher revenue per user as demand from advertisers remained strong. In addition, the impact of Apple’s iOS changes with focus on data privacy was not significant as advertisers used the firm’s full-funnel tools for broad based and direct response marketing. We are pleased with the firm’s strategy to continue investing in new features and expanding its reach into new international markets to drive further growth. While these efforts will pressure margins in 2022, we expect profitability to improve in 2023 and beyond as user and content growth from those investments attracts more advertisers. With lower user growth assumptions for this year and the impact of investments on margins, we have lowered our fair value estimate to $60 from $67. We believe this narrow-moat name represents an attractive investment opportunity.
As Pinterest laps the positive impact that the pandemic had on its user base in second half of 2020 and the first six months of last year, we expect a return to growth in the platform’s monthly active users this year, after which the positive impact of the firm’s network effect on revenue growth and margin expansion should become more apparent. In the meantime, we expect Pinterest’s aggressive investment in more creative content generation by its users to more than offset slowdown in traffic from Google search which is due to Google’s regular search algorithm adjustments. In addition, more short form video content could also attract more advertisers, further increasing user monetization. Growth of more user-generated video content won’t just keep users engaged but will also attract both direct-response and brand advertisers. We also believe small and large advertisers will view the format as an effective word-of-mouth channel for marketing.”
Tom Lauricella does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.