Since the start of the year, Facebook’s share price is up by a robust 40%, Snap’s has soared by 176% and Twitter’s has climbed by an impressive 48%. Over the past three months, they have made gains of 5.5%, 13% and 17%, respectively. In comparison, the S&P 500 and Nasdaq are up by 19.8% and 22.6% so far this year, while their respective gains since mid-June are just 4 % and 4.3%.
When trying to determine which of the three stocks can keep up the momentum for the rest of 2019, it’s important to look at the factors that have been fuelling their gains, as well as the downside risks. Two of the biggest drivers appear to be strong earnings and a healthy growth outlook.
|Quarterly Revenue Growth (YoY)||27.60%||48.00%||18.40%|
|Operating margin (TTM)||34.41%||-79.64%||14.34%|
Facebook, Snap & Twitter share price vitals, Yahoo Finance, 16 September 2019
Will Snap pop or fizz?
Snap’s share price reached a 52-week high of $18.36 on 26 July after the company released strong second-quarter earnings. What stood out in Snap’s report was the number of daily active users it sequentially added during the quarter – 13m – which was 18% higher than analysts had expected, according to Marketwatch.
Snap’s daily active users are expected to grow to 205.8m in the third quarter, according to Bloomberg MODL estimates, up from 203m in the second quarter. If Snap manages to deliver higher-than-expected daily active users again next quarter, its share price could be in store for more strong gains.
But MoffettNathanson analyst Michael Nathanson said Snap’s high valuation is a cause for worry. With a multiple that is estimated to be around 11 times the company’s forward revenue, Snap has “one of the richest valuations we have ever seen”, he said. Adding to the caution was Needham analyst Laura Martin, who thinks Snap “must raise capital over the next 12 months, which we believe creates an overhang for its share price”.
Snap's expected daily active users in Q3
Monetising Twitter users
Twitter’s share price reached a high of $45.68 on 6 September. The company “has consistently trounced Wall Street profit targets over the past year”, according to The Motley Fool contributor Rick Munarriz. “Revenue rose 18% in its latest quarter this summer, up 20% on a constant currency basis. There were once concerns about stagnant account growth and waning interest on its home turf, but US revenue soared 24% for the second quarter. Twitter also claims to be better about tackling ‘spammy’ accounts, realising that it will be under the microscope as we head into the 2020 [US presidential] election,” Munarriz said.
In its second-quarter earnings release in late July, Twitter stopped reporting monthly active users and introduced a new metric to measure user engagement: monetisable daily active users. That metric produces a figure that is not comparable to Snap’s and Facebook’s measure of daily active users, Twitter said, because the latter is “a more expansive metric that includes people who are not seeing ads”. Twitter’s figure for monetisable daily active users is, therefore, smaller than its rivals’ daily active user figures.
Twitter’s average monetisable daily active users in the second quarter reached 139m, up by 14% from a year earlier. Adjusted earnings per share came in a cent higher than expected at $0.20, while revenue totalled $841m, which was 1.4% higher than expected, according to a Refinitiv survey of analysts.
Twiter's daily active users in Q2
If Twitter's share price manages to increase above $60, “its P/E ratio would only rise to about 20, and it would still be considered a relatively undervalued tech stock,” according to The Motley Fool contributor David Jagielski. “While that $60 range would still be nowhere near its all-time high of more than $74, which it reached in its early IPO days, it would still be a significant return from where the stock is today.”
Facebook and the spectre of regulatory scrutiny
Although Facebook’s share price gains lag those of Snap and Twitter, the stock is still offering investors some very attractive returns. In late July, Facebook reported a 28% year-on-year increase in second-quarter revenue, while earnings per share of $1.99 beat a Bloomberg consensus forecast of $1.88, CMC Markets analyst Margaret Yang Yan said. But if increasing regulatory scrutiny results in a major break-up of Facebook’s structure and business model, investors exposed to the stock could face huge losses.
"Uncertainty is still too high to recommend investors avoid stocks in the regulatory spotlight," Goldman Sachs strategists Ryan Hammond and David Kostin said. But they noted that if it becomes clear that the US government will be taking legal action against tech companies, “investors should reduce exposure to any stock that becomes subject to an antitrust lawsuit."
US lawmakers on the House Judiciary Committee said on 13 September they have requested documents and emails from Facebook, Apple, Amazon and Google to help with an ongoing investigation. The committee’s chairman said there was “growing evidence that a handful of corporations have come to capture an outsized share of online commerce and communications”, according to The Wall Street Journal.
“Uncertainty is still too high to recommend investors avoid stocks in the regulatory spotlight” - Goldman Sachs strategists Ryan Hammond & David Kostin
On 6 September, several US state attorneys general said they plan to investigate whether Facebook stifled competition and put consumers at risk. A Facebook spokesperson said: “We will work constructively with state attorneys general and we welcome a conversation with policymakers about the competitive environment in which we operate.”