How do you define a hot stock?
Based on the huge rally of Snap (NYSE:SNAP) stock, up 177% in 2019, SNAP stock looks like the poster child for hot stocks.
In March, I wondered if SNAP stock could hit $20. As I write this, it’s within $5.12 of hitting that once unthinkable dollar amount.
That’s great news for people like Snapchat CEO Evan Spiegel, who’s seen his net worth jump to $3.3 billion in 2019.
In March, I made it clear that I wouldn’t buy SNAP stock, but I urged aggressive investors to do so. Since then, it’s gained about 40%; SNAP stock needs to rise another 30% to hit $20.
While I believe it could hit $20 before the end of 2019, I think it’s worthwhile to consider whether it’s still the best buy among social media stocks. Alternatively, should investors consider buying Pinterest (NYSE:PINS) instead?
To help figure that out, I’m going to look at each’s company’s pathway to profitability, because, in my opinion, the better stock to own is the one that’s more likely to become and stay profitable for a very long time.
Snap’s Pathway to Profitability
In April, Financial Times reporters Elaine Moore and Tim Bradshaw wrote that Snapchat would essentially run out of money if the company does not stop burning cash within three years.
“According to a Financial Times analysis, the company has just over three years to become cash flow-neutral before it will need to raise fresh funds. In that time, Snap must raise user numbers and cut costs while fighting off Facebook’s (NASDAQ:FB) plan to neutralize all and any competition,” Moore and Bradshaw wrote in an article published on Apr. 19.
The authors made the point that Snap’s been burning cash at a rate of $68 million per month. In recent quarters, Snapchat has been able to cut its costs, thereby lowering the amount of cash that it burns every month.
Unfortunately, CFO Tim Stone, who is credited with engineering much of the cost cutting, is now the CFO of Ford (NYSE:F). Stone joined the car company on June 1, mere months after he announced that he was leaving Snap. Snapchat promoted its VP of Finance, Derek Andersen, to the CFO role on May 20.
Snap is slated to report its second-quarter results on July 23.
In Q1, it managed to grow its daily active users (DAUs) by 2% to 190 million, 4 million higher than in Q4. On a year over year basis, however, Snapchat’s DAUs dropped by 1 million.
In terms of profits, it lost $310.4 million in Q1, $75 million less than in the same quarter a year earlier. While that’s progress, Snapchat still lost more than $1.1 billion over the 12 months that ended in March. On a cash flow basis, it’s generated a negative cash flow of $524 million over the 12 months that ended in March.
For the owners of SNAP stock, it’s vital for the company to announce that it reduced its losses and cash burn in Q2.
Pinterest’s Pathway to Profitability
Pinterest reported its first quarter as a public company in mid-May, and while its losses were higher than expected, analysts felt that it was on the pathway to profitability.
“We believe the company addresses a large market opportunity, is a leading player with scale, provides a strong value proposition to both consumers and advertisers, has an arguably clear path to profitability, and will benefit from several LT growth drivers,” RBC analyst Mark Mahaney said on May 17 after the company announced its earnings.
Atlantic Equities analyst James Cordwell also thinks that Pinterest can become profitabile in the medium term.
Let’s consider Pinterest’s financial situation.
It finished Q1 with $642 million of cash and marketable securities, along with zero debt on its balance sheet. While its net loss was higher than expected, it still managed to reduce it by 21% year-over-year to $41.4 million, as its revenue surged to $201.9 million.
As far as cash flow is concerned, Pinterest generated $33.1 million of operating cash flow during the quarter, a 145% increase over a year earlier. So, despite losing $41 million in the quarter, it managed to generate free cash flow of $29 million.
By comparison, Snapchat generated negative operating cash flow of $66.2 million in Q1, 71% better than a year earlier, but $99.3 million less than Pinterest.
For every dollar of operating losses, Pinterest generated $4.51 of revenue, while Snap reported $1.01 of revenue for every dollar of operating losses.
The Bottom Line on SNAP Stock
While SNAP stock has come a long way, I believe that Pinterest’s pathway to profitability is easier than Snap’s.
SNAP stock will likely hit $20 in the next 6-12 months. However, over the long term, PINS stock appears to be the better buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.