7 Social Media Stocks: Buy Or Hype?

And while ad engagements increase of 50% is impressive on its own, they become less so when you recall that Twitter saw a 99% growth in ad engagements during the same quarter in 2017. Ad engagements grew 81% in the second quarter of 2018, so Twitter’s growth in this category has begun to slow.

The average earnings-per-share estimate for Twitter for the year is $0.80. Based off of the current price of $31.12, Twitter trades with a current multiple of 38.9. Unlike Snap, Twitter is profitable, but much more expensive than the next two social media names on our list.

While Twitter saw record revenue and posted attractive growth rates in both its domestic and international markets, we think investors should avoid buying shares of the company.Given the declines in users, we think paying nearly 39x earnings estimates is far too expensive for Twitter.

Social Media Stock #3: Facebook (FB)

Facebook is the social media industry leader. In the most recent reported quarter, Facebook had nearly 2.3 billion members use their services per month and almost 1.5 billion people accessed Facebook every day. This total dwarfs Snap’s or Twitter’s numbers. This type of user engagement attracts the attention of advertisers in a big way.

Shares of Facebook currently sit at $131.73, a decline of nearly 13% in just the last month and nearly 40% drop from its all-time high on July 26. This drop in price can largely be attributed to self-inflicted wounds as the company has found itself in a variety of scandals.

In March of 2018, it was revealed that Cambridge Analytica, a British political consulting firm, had used data from more than 50 million users without their permission, which was then used by the Trump campaign to target voters during the 2016 presidential election. CEO Mark Zuckerberg testified before Congress later that month in regard to this issue.

In late September and early October, it was revealed that a security breach had impacted 30 million Facebook users, of which 14 million had personal information exposed. Then on November 14, it become public knowledge that Facebook had attempted to control the discussion around its social media network. The company hired an opposition research firm to produce articles criticizing business practices of other large tech firms, such as Apple (AAPL) and Alphabet (GOOGL). In addition, Facebook has seen numerous top executives leave in recent months, including the co-founders of WhatsApp and Instagram.

The bevy of scandals and drain of high ranking talent has weighed on the stock since late July. An earnings miss during the second quarter as well as the company’s statement that revenue growth rates would be below the previous year also contributed to the decline in shares.

It is clear that Facebook has suffered some missteps over the past few months, but is the stock worth considering based on the business fundamentals?

Facebook reported third quarter financial results on October 30. The company earned $1.76 per share, $0.30 above estimates and an improvement of almost 11% year-over-year. Revenue grew 33% to $13.73 billion, but missed estimates by $40 million. This quarter represented Facebook’s lowest revenue growth total since the company went public in May of 2012.

Facebook’s DAUs increased 9% to 1.49 billion, but below expectations of 1.51 billion. Monthly active users improved 10% to 2.27 billion, but this too was slightly below expectations of 2.29 billion. Amazingly, despite the scandals, Facebook’s ratio of DAUs to MAUs has remained stable at 66%.


Source: Facebook’s Third Quarter Financial Results Presentation, slide 2.

Revenue per user increased 20% to $6.09. Both DAUs and ARPUs were up slightly sequentially as well.  Again, despite the negativity surrounding Facebook, revenue per user in the U.S./Canada region grew 30%, topping growth rates for Europe (29%), Asia-Pacific (17.6%) and the Rest of World (14.4%). Despite the company’s issues, advertisers continue to pay for ads as the company provides them with a large potential customers base.


Source: Facebook’s Third Quarter Financial Results Presentation, slide 8.

The 40% decline from its high has brought Facebook’s valuation to a less lofty perch. Based off the 11/23/2018 closing price of $131.73 and the average analysts’ EPS estimate for 2018 of $7.37, Facebook’s stock has a price-to-earnings ratio of 17.9.  Value Line says the average P/E ratio over the past five years is nearly 50. Facebook had an average P/E of 25.3 in 2017. For comparison purposes, the S&P 500 has a current P/E of 21.5.

Investors looking for exposure to the social media sector could see Facebook as a ‘growth at a reasonable price’ play. Compared to the valuation of the market as well as its own history, Facebook shares are somewhere between slightly undervalued to dramatically undervalued.

However, we only recommend that investors with a high tolerance for risk purchase shares of Facebook due to the company’s ongoing issues and the slightly lower than anticipated revenue growth, coupled with the fact that the company does not have a long (multi-decade) history of success showing stability.

Yelp (YELP)

Yelp is a local-search service that allows users to log in and rate and review their experiences with local businesses. This service is primarily geared towards restaurants, but can be used for other types of businesses, such as handyman and repair services. Users can access the website and rate their experiences at a local business and write reviews. Other users can then read the reviews and use them to influence their decision about using these businesses.

Yelp is a very popular search service, averaging thirty-four million unique visitors to their app and seventy-five million visits through the website during the most recent quarter. Reviewers left more than 171 million reviews as well.

Yelp reported third quarter financial results on November 8.

Yelp Q3

Source: Yelp’s Third Quarter Financial Results Press Release.

Earnings-per-share nearly doubled year-over-year to $0.17. This beat analysts’ estimates by $0.07. Revenue grew 8% to $241.1 million, though this was $4.3 million below what analysts were looking for. Adjusted EBITDA of $50.3 million was a $7 million increase from the previous year, but was below estimates for $51.4 million.

A major factor in the lower than expected results is that Yelp recently has instituted a no initial term commitment for advertisers. This allows advertisers to pull their ads if they feel they aren’t generating a solid return on their investment. Since the start of the year, this has led to a 60% increase in new advertisers, a growth rate that Yelp hasn’t seen since inception. While this could be a long term positive for Yelp, it can also lead to more volatile revenue growth in the short term, as was the case during the third quarter. The miss in revenues and adjusted EBITDA led to a 30% decline in shares of Yelp following the results release.

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