Is it a good time to buy social media stocks?

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social media stocks

Global economic problems, such as fears of a recession, have affected social networks. There has been a decline in digital advertising revenues and so the question arises as to whether the dip of social media stocks is a good buying opportunity.

Companies like Meta Platforms and Snap have been in the eye of the storm due to the volatility of digital advertising revenue. Investors, primarily in Snap, became concerned after the company’s October earnings report. It posted the slowest revenue growth since its IPO five years ago, which Snap claims are due to inflation. Both companies require further analysis.

Meta Platforms

Meta Platforms, the parent company of Facebook, Instagram, and WhatsApp, has been a leader in the social networking market for several years. The company’s shares rose 0.20% to $136.98 last Friday, sealing the second consecutive day of gains.

While the pre-weekend numbers were positive, the company has been hit by Snap’s inflationary warning and falling ad revenue. Despite Meta shares gaining 18% last month, they have fallen 60% over the past 12 months. 

US digital ad spending will come in at around $278.6 billion, down from the previous forecast of $284.1 billion. Digital ad revenue also declined partly following Apple’s iOS update, so Meta announced in early 2022 that it expected app tracking changes to subtract $10 billion.

For its part, TikTok has been undercutting rivals with cheaper ads, so several brands are moving from Facebook, Twitter, and YouTube to the China-based social network.

CEO Mark Zuckerberg announced a new focus on the metaverse when Facebook rebranded as Meta Platforms at the end of 2021. Meta’s metaverse, Reality Labs, lost more than $9 billion in the first three quarters of 2022 alone and expects to lose even more in 2023. For this reason, Meta is laying off 13% of its staff to solve and cope with mounting losses.

Snap, Inc.

On the other hand, Snap has a more complicated outlook. Five years after going public, the company remains unprofitable on an annual basis. Uncertainty in the global economy and slowing ad revenues worry investors and that brings a bearish view for the company.

Snap’s stock lost nearly 80% of its value in 2022 versus a 19% drop in the S&P 500. Thus, at its current price of $10, it trades 18% below the fair value of $12.

To avoid weakening itself financially, Snap announced plans in August to cut 20% of its workforce and halt side projects such as gaming and its camera drone. This was a good decision due to the context in which the company found itself.

Also, while Snap did have problems with its advertising revenue, the upside is that it was not as affected by Apple’s iOS update as Meta. 

In 2021, the company posted revenue of $4.1 billion, giving it a loss of $488 million. In the last 12 months, the company lost $1.1 billion on revenue of $4.6 billion, thus, it is concerning that Snap does not indicate that profitability may be coming soon.

Should you invest in social media stocks?

The specialists rate Meta Platforms with a “Moderate Buy” rating. At $147.74, the average target price for Meta Platforms shares implies an upside potential of 8.1%. Snap, meanwhile, has a “Hold” rating; at $10.27, the average target price for the company’s shares implies a potential upside of 6.5%. 

Comparing one company to the other, Meta has an edge mainly because it is a profitable company. While it is true that its outlook is not as dark as Snap’s, its losses in the metaverse prevent a bullish view for the company and put it on a more neutral plane.

Even though the scenario doesn’t look that promising, some investors may think these uncertain times orchestrate the perfect opportunity to buy social media stocks at a lower price. What are your thoughts? Do you think this is a good time to invest in either of these companies? Would you consider buying the dip?

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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)

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