Why Snap Stock Looks Superior to Facebook Stock

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Snap stock - Why Snap Stock Looks Superior to Facebook Stock

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After Facebook  (NASDAQ:FB)and Snap (NASDAQ:SNAP) reported their third-quarter results recently, it’s clear that Snap stock has much more upside potential in coming months than Facebook stock.

Q3 Financial Results

Snap’s Q3 financial results had multiple, very positive aspects.

The company beat expectations on the top and bottom lines, with its revenue surging 43% year-over-year and 14% sequentially. Its average revenue per user, or ARPU,  came in at at $1.60, versus the consensus outlook of $1.52. Moreover, its ARPU climbed 37% year-over-year while its operating cash flow improved $61 million versus the third quarter of 2017 and $67 million versus Q3. It appears that, as I predicted previously, advertisers are paying more for exposure to Snap’s young users as they age and start spending more money.

Despite Facebook’s huge size and tremendous success, the company does not appear to be growing as quickly as Snap.

Facebook’s income from operations fell sequentially, and its operating income margin declined to 42% from 50% in the third quarter of 2017. As I’ve noted previously, the tremendous amount of money that FB has to spend on security in the wake of its scandals is clearly weighing on its results, and by extension, on Facebook stock.

Meanwhile, FB expects its YOY revenue growth percentage to fall by mid to high single digits in Q4. Although that’s a slight improvement from its previous guidance of a high single-digit decline, it’s still quite disheartening for owners of Facebook stock. The revenue deceleration suggests that the company is losing digital-ad market share. Perhaps the growth of Amazon’s (NASDAQ:AMZN) ad business, along with Snap’s growth, is weighing on Facebook’s ad revenue.

Snap’s Initiatives Look Superior to Facebook’s Changes

Facebook admitted that the rollout of ad products for its Stories, which appears to be its most important initiative, isn’t going that well. Specifically, Facebook CEO Mark Zuckerberg said that the company isn’t making as much money from Stories ads as it does from Feed ads, and warned that the transition to utilizing Feed ads could slow the company’s revenue growth.

Meanwhile, Facebook is also working on enhancing its video offerings. But FB will probably have a hard time getting many advertisers to buy video ads, since the company was accused of inflating its video viewership data by huge amounts a couple of years ago. Finally, Facebook has begun charging businesses to send messages on WhatsApp, but it’s difficult to envision that initiative gaining much traction, either. In my opinion, those ads will feel very similar to spam e-mail messages, which users find annoying and largely ignore.  So Facebook’s changes probably won’t boost the company’s results or Facebook stock much.

Conversely, Snapchat’s Collection Ads sound quite innovative and seem to be working very well.

Collection Ads “allow commerce advertisers to showcase up to four products on a standard Snap Ad,” Snap CEO Evan Spiegel explained during the company’s results conference call. Collections Ads drove significantly higher engagement rates than Snapchat’s usual ads and “E-bay’s (NASDAQ:EBAY) engagement rate, for example, was five times higher with their Collection Ad than their typical Snap Ad,” Spiegel reported.

Snap has also launched 12 original shows in its app. Of course, as the tremendous success of cable and network TV has demonstrated over the years, quality original shows are a great advertising vehicle and generate large amounts of revenue.

In a very good sign for the initiative, Spiegel reported that “a variety of brands,” including such major names as Fox (NASDAQ:FOXA), Comcast’s (NASDAQ:CMCSA) Universal, Chick-fil-A and Sprint (NYSE:S) subsidiary Boost Mobile have launched ads on the shows.

The Bottom Line on Facebook Stock vs Snap Stock

Facebook stock is beset by problems, its profits aren’t growing very much, and its growth is decelerating. Meanwhile, its initiatives seem weak and unpromising. Snap stock poses more risk, but it’s growing much more quickly, and its initiatives seem to have much more potential. Moreover, it, unlike Facebook stock, can become a takeover target.

I recommend that longer term investors who are not risk-averse buy Snap stock and sell Facebook stock.

As of this writing, the author did not own shares of any of the companies mentioned.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


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