Thursday, February 14, 2019

4 Reasons Investors Should Buy Snap Stock Instead of Facebook Stock

The fastest way to make a great deal of money with stocks is to invest in an up-and-coming name that’s not yet getting a great deal of respect from the Street. I would argue that Snap (NYSE: SNAP) is definitely in that category, despite the 50%-plus run-up in SNAP stock this year.

Conversely, the risk-reward ratio of large, well-established companies whose growth has likely peaked isn’t too high. Even in the unlikely event that such a company manages to find a way to accelerate its growth, the stock probably won’t rise nearly as much as one that defies the Street’s forecast. On the other hand, the well-established company’s stock will see a significant drop if its growth slows more than the Street’s expectation. I believe that Facebook (NASDAQ:FB) is this latter type of company.

Here are my four reasons for a bullish view on Snap stock and my bearish outlook on Facebook stock.

#1: Bottom Line Growth

Simply put, Snap’s bottom line growth is accelerating while Facebook’s is headed in the opposite direction.

Facebook’s income from operations rose a paltry 6.4% year-over-year last quarter, down from 61% growth in the fourth quarter of 2017. Meanwhile, Snap’s adjusted EBITDA surged by $109 million YoY last quarter, versus a $41 million improvement in Q3. In Q4 2017, SNAP reported that its EBITDA tumbled by $38 million YoY.

Clearly, SNAP — and SNAP stock — look poised to benefit from accelerating profit growth, while Facebook stock is being weighed down by a slowing bottom line.

#2: Multiple Initiatives Are Boosting SNAP Stock

Viewership of Snap’s original TV shows appears to be growing quickly, as a large share of Snap’s audience likes at least some of the website’s shows.

More than 40% of the people who caught an episode of the new Snap show The Dead Girls Detective Agency went on to watch the entire season. Management also told Q4 conference call participants that the animated Bitmoji Stories reached more than 40 million viewers in December. In sum, the number of people watching marketers’ shows on Snapchat jumped 30% year-over-year, with 25 million-35 million people watching NBC News’ show on Snapchat.

I interpret these statistics as evidence that SNAP’s shows are quite sticky. That stickiness is improving the platform’s user metrics, causing its bottom line to accelerate rapidly.

On the other hand, even FB CEO Mark Zuckerberg has admitted that for the last couple of years, the company has focused primarily on social issues like election integrity, content governance, safety and security, and data privacy. All of those initiatives represent defensive reactions by Facebook to its past mistakes rather than efforts that can really improve its bottom line and boost FB stock in the process. Although Zuckerberg indicated that the social network would pivot this year to more ambitious, offense initiatives, he wasn’t very specific about them and none of them seemed groundbreaking.

#3: SNAP Stock is Hotter Than FB Stock

Facebook stock has jumped 33% since its Christmas Eve lows and about 10% since its Q4 earnings report. But SNAP stock has positively been on fire, soaring nearly 80% since Dec. 24 and climbing close to 30% in the wake of its earnings report last week. Sometimes in investing, it pays to go with the momentum, and this feels like one of those times.

#4: SNAP Stock’s Strong, Built-In Positive Catalyst

As I’ve noted in the past, SNAP stock should benefit from higher revenue as its young fans get older. That’s because, as they mature, they will get jobs and make money, becoming much more attractive to advertisers.

There were multiple indications in Snap’s Q4 results of this phenomenon. Specifically, the company’s average revenue per user (ARPU) jumped 37% YoY, indicating that advertisers are indeed paying much more for each of Snap’s users. The phenomenon is likely also partly responsible for the dramatic jump in Snap’s gross margin, which surged to a record 48% last quarter, versus 36% in the same period a year earlier.

Bottom Line on SNAP Stock

Additionally, SNAP cited an endorsement from Procter & Gamble’s (NYSE:PG) head of digital partnerships, Craig Stimmel: “To continue driving growth across our businesses, it is critical to connect with Gen Z and Millennials; Snapchat has been an important part in that strategy.” Many advertisers are going to be willing to pay more to connect with members of Gen Z and with millennials as their net worth increases.

SNAP and SNAP stock should continue to benefit from that trend. FB and Facebook stock will not benefit nearly as much from the trend because U.S. millennials and Gen Z make up a much smaller portion of its audience than Snapchat’s.

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

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