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Over the last decade, social media platforms have grown dramatically to become an important part of people’s lives. As we enter a new chapter of the Internet, new players are entering the social media space and competition is reaching new highs. This highly competitive nature of the industry calls for existing players to step up their game to remain relevant. There is no room for a social media platform to undermine the threat posed by new players. A classic example is how TikTok, with the introduction of short-form video content, is threatening dominant players such as Facebook and Instagram owned by Meta Platforms, Inc. (FB). TikTok’s popularity during the pandemic has boosted the creator economy, and content creation is increasingly being recognized as a full-time career.
With tech stocks taking a plunge, many high-growth companies appear to be trading at very attractive prices compared to a few months ago. In this article, we will look at Pinterest, Inc. (NYSE:PINS) and Snap, Inc. (NYSE:SNAP) to determine which of these stocks is the better buy for long-term-oriented investors.
While both these companies serve the same market, they each provide a unique service. Pinterest, for example, was created to allow users to Pin their interests. Pinterest is a digital idea-sharing platform with over 400 million users who share and save photos, videos, and links to different ideas. What distinguishes Pinterest is its Pin Board, where users can add/save ideas for future reference. This platform is frequently compared to owning a website or a blog because Pinterest’s searchability works similarly to a website and a post lasts much longer on Pinterest than on any other social media app.
Snapchat, on the other hand, entered the market intending to create a messaging platform that is different from the existing options at the time. Snapchat’s main feature is that pictures and messages are meant to disappear automatically. The platform allows messages to be in recipients’ inboxes for a limited time before they become inaccessible, and messages also disappear once viewed. Snapchat, therefore, primarily functions as a messaging app whereas Pinterest is more of a platform that helps users browse and save content.
Both PINS and SNAP have disappointed investors in the last 12 months and are trading lower this year despite showing signs of growth. Meta Platforms stock did not struggle until the beginning of this year, but PINS and SNAP have been under pressure for much longer because of competitive pressures. This is understandable given both these platforms are yet to develop strong competitive advantages, which leaves them vulnerable to competitive pressure.
Exhibit 1: PINS vs SNAP performance in the last 12 months
While Snapchat’s userbase has grown consistently in the last three years, investors have been concerned by the company’s struggles in the ad business. Snap does not have the same advantages in the advertising market as some of its competitors. The company recently began testing ad-supported short-form video content, but it was hampered by the new iOS update rolled out by Apple, Inc. (AAPL) and also because of European civil unrest.
Snapchat’s Daily Active Users increased in Q1, but its revenue and earnings fell short of expectations. The company reported $1.06 billion in revenue, up 38% year-over-year, but fell short of its target of 44% revenue growth as some advertisers paused their campaigns after Russia invaded Ukraine on February 24. With the introduction of the new creators’ features, the company was able to increase its global daily active users to 332 million, an increase of 18% year-over-year, and the average revenue per user increased to $3.20, or 16.8%. Snap is currently struggling to make its ad business sustainable due to one simple reason; the company has entered a highly competitive market at a very uncertain time. Snap continues to focus on AR and VR investments with its viral filters, Bitmoji Avatar, and AR creation tools to capture the interest of young users.
Exhibit 2: Snapchat DAUs
Q1 earnings presentation
Turning to Pinterest, macroeconomic headwinds resulting from Russia’s invasion of Ukraine, global supply chain issues, and rising inflation have all had an impact on the company’s revenue growth, with advertisers suspending or cutting their budgets. The reopening of the economy, among other things, has led to a decline in Pinterest’s monthly active users as well.
Pinterest reported strong revenue growth in Q1 exceeding Wall Street estimates, but user growth continued to decline. PINS revenue for the quarter came to $575 million, up 18% year-over-year, and the global average revenue per user reached $1.33, up 28% YoY despite a 9% drop in monthly active users (MAUs) to 433 million. Given the current economic situation, MAUs and advertising revenue might see slower growth in the next few quarters as well.
Exhibit 3: Pinterest MAUs
A comparison between the two companies reveals that Snapchat is facing challenges in monetizing its userbase whereas Pinterest is facing challenges to retain its userbase. Pinterest and Snap, therefore, are facing unique challenges that do not necessarily stem from macroeconomic developments.
Snapchat has evolved from its initial focus on disappearing messages to focus on virtual stickers and filters to improve the Stories and Discover features for ad-supported content. The company is also experimenting with short-form video content with Spotlight, which has been a success so far, with Snap reporting a 230% increase in total time spent on Spotlight in the first quarter. The number of Spotlight submissions that used creative tools or Lenses increased by 350% as well. Snapchat Discover, which features content generated by celebrities, news and entertainment sources, and other popular users, has witnessed massive growth, with total daily time spent by users aged 25 and up increasing by more than 25% YoY in Q1.
As Snap strives to establish itself as a leading platform for new forms of entertainment, the company continues to invest in creating better Augmented Reality experiences. This is proving to be a growth driver for the company with 250 million Snapchatters using AR features regularly to build over 2.5 million Lenses through its Lens Studio. Snap has also built effective measurement solutions for advertisers to evaluate the success of their campaigns as the social media platform grapples with Apple’s 2021 privacy changes, which makes it harder to target and measure the performance of ads on iPhones.
Snapchat’s focus is on building better features for users and tools for advertisers, which seems the right strategy as the company is facing monetization challenges despite being able to grow its active userbase.
Pinterest, on the other hand, is continuing to rollout new features for creators, such as publishing tools in 37 markets and 150 new features that would benefit both Pinners and Creators with the objective of attracting high-quality creators to its platform. In addition, the company has begun to embrace short-form video content and is investing in the creation of Story Pins, which will help drive engagement in the coming quarters. Pins last much longer than those on any other social networking platform, which makes them a cost-effective option for advertisers to promote their products and services. This is exactly why ARPU and revenue have increased despite repeated drops in MAUs.
Pinterest is now focused on becoming a social shopping platform as well, where Pinners can not only explore but also discover and buy products that inspire them on the platform. For advertisers and brands, the platform provides a feature called “collections ads,” which displays multiple products from brand catalogs in a slideshow format. Recently, the company announced the launch of Checkout, a new tool that allows users to buy something they see on Pinterest without leaving the website. This year, the company plans to expand Pinterest into Colombia, Chile, and Argentina, as well as monetize the userbase in Japan.
Similar to how Snapchat is working toward addressing the unique challenges it is facing, Pinterest is also focused on addressing the challenges the platform is facing in attracting and retaining users.
If the U.S. economy enters a recession, the advertising industry will take a massive hit, which has been the case every single time the American economy faced broad challenges. Businesses are likely to cut advertising and marketing costs, which will affect both Pinterest and Snapchat. With many analysts and investing gurus calling for a recession later this year, I believe this is a risk worth highlighting although I personally do not recommend predicting recessions.
Advertisers are still under pressure from supply chain disruptions and rising prices and this has led them to cut spending already, which creates a challenging operating environment for both Snap and Pinterest.
Both these platforms continue to spend on app updates and creator tools, implying that expenses would rise, affecting net income and free cash flow. One key difference that puts Snap at a greater risk than Pinterest is that Pinterest caters to a wider age range, whereas Snapchat primarily caters to younger users. Pinterest’s universal appeal makes it easier for the company to monetize its userbase whereas it’s the opposite for Snap.
Pinterest faces the issue of fluctuating MAU growth. Although monthly active users increased in Q1 sequentially, it is unclear whether this trend will continue in the current quarter. If MAUs continue to decline, revenue growth would suffer as well, because, after a certain level, the average revenue per user will plateau. The ARPU in the United States and Canada is much higher than in other geographic segments – similar to Facebook – but Pinterest is losing ground in these markets which is a warning sign.
Pinterest is tapping into profitability thanks to higher monetization rates, whereas Snap is still a long way from reaching profitability. From a price-to-sales perspective, Snap is richly valued in comparison to Pinterest but Snap is also expected to report higher revenue growth in the coming quarters.
Exhibit 4: PINS vs SNAP price-to-sales ratio
Although Snap might report better revenue growth in the next few quarters compared to Pinterest, I believe the company will continue to find it difficult to monetize its userbase as advertisers want eyeballs to be glued to a specific form of content for as long as possible to drive engagement higher. True, Snapchat is much more advertiser-friendly today than it used to be, and the company is focused on attracting high-quality creators to drive engagement higher. However, I believe this would be a difficult task given that competitors are offering much better revenue-sharing terms for creators.
Pinterest, in my opinion, is better positioned to drive earnings higher if it addresses the challenges with regard to the retention of users. It’s too early to predict, but I believe Pinterest might be able to do this with its focus on social shopping and the introduction of new content formats. For this reason, I believe PINS stock is a better buy in comparison to SNAP stock if an investor had to choose between them.
Pinterest and Snapchat have their own problems to deal with in addition to macroeconomic and geopolitical challenges faced by the social media industry as a whole. Pinterest stands out as the better pick in comparison to Snap, but I believe growth investors would be far better off investing in Meta Platforms at these discounted prices.
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This article was written by
I am an investment analyst with 7 years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities. Please click the “Follow” button to get timely updates on new articles.
I am the founder of Leads From Gurus, a Marketplace service on Seeking Alpha that focuses on uncovering alpha-generating opportunities.
I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, and GuruFocus.
I’m a CFA level 3 candidate, an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK), and a candidate in the Chartered Wealth Manager program.
During my free time, I enjoy reading.
Disclosure: I/we have a beneficial long position in the shares of FB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.