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) have each taken a hit Thursday along with a more than 25% dive in Meta, Facebook’s parent company.
However, these social media stocks are also deeply undervalued by Morningstar’s valuation metrics. Even before Thursdays sell off, Snap and Pinterest were in 5-star territory, the level considered the most under valued in our Star Rating system 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.), 30-35% 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.”
Michael Hodel, director of equity research, media & telecom at Morningstar, notes that one of the unknowns hamstringing these stocks is whether online time will increase at anything close to the same rate it has over the past couple years, especially in developed markets. “That at leaves FB and its peers looking to steadily increase ad effectiveness to help push ad prices higher. To me, this is the million dollar question: will data privacy policy changes at Apple, etc. or increased regulation offset any effort to improve ad formats and targeting mechanisms over time?”
Here are some highlights from Mogharabi’s recent commentary on Twitter, Snap and Pinterest. Mogharabi’s note take 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.
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.”
Snap
“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.
Our fair value estimate for Snap is $70 per share, which represents an enterprise value/sales multiple of 20 in 2022. We project tremendous revenue growth for Snap at a 10-year average rate of 30%. Within our discounted cash flow model’s initial 10-year projection, we have assumed that Snap will become profitable in 2023 and will improve its current operating loss to an operating margin of 40% by 2030. Snap’s revenue growth will be driven primarily by growth in the firm’s daily active users, or DAUs, user engagement, overall online advertising spending, more adoption of the augmented reality ad format, and an increasing allocation of online ad dollars toward mobile and social network ads, in addition to the firm’s more aggressive monetization of Snap Map, Communication (chat, minis, and games), and camera. We expect recovery from COVID-19 to further boost top-line growth.”
“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. In our view, Pinterest can attract various types of ad campaigns through the marketing funnel--from broad exposure or awareness to targeting and actual conversion. We think opportunities exist for the firm to gradually increase its share of the U.S. digital advertising market, as well as grow internationally (mainly in Europe) in terms of both users and ad dollars collected from this audience
We expect higher user growth in 2022 and beyond as the impact of the pandemic, which pulled user growth forward, will be lapped. We also expect the firm’s latest offerings that attract content creators and improve users’ shopping and purchasing experiences on the platform to drive user growth. In addition, we think some advertisers will come back after macro issues related to supply chain and labor shortage are resolved. Plus, as expected, Apple’s policies appear to have hit Pinterest less than some of its peers. Until then, however, we now assume a further decline in U.S. users and a deceleration in overall user growth for Pinterest during the remainder of (2021). In our view, narrow-moat Pinterest remains attractive. We also think after the return of consistent and stable user growth to the platform the firm may become an acquisition target again.”
