Thinking about investing in Snap Inc. (SNAP)? Better stick with Facebook (FB).

Most of us have probably watched the epic price drop from $28 at IPO in April 2017 to just under $6 at the end of 2019. Since then, the stock made a stellar recovery to $26 at the beginning of July. The stock price chart created a nice cup and seems to have started to build a handle.

Snap Inc. (SNAP) stock chart showing it might be building long-term cup-and-handle formation
Is Snap Inc. (SNAP) stock chart about to start forming cup-and-handle formation?

So, what happened? Will Snap Inc. (SNAP) stock continue to grow?

Let’s first look at Snap Inc. (SNAP) past and predicted revenue and earnings growth.

Analysts predict accelerating growth in sales for the next 4 years. With that, Snap Inc. is expected to start generating profit in 2023.

Snap Inc. (SNAP) Revenue and Earnings predictions for years 2020-2024

Predicted profit will give EPS of $0.10 in 2023 and $0.47 in 2024. If we use the current price, this EPS will provide for a forward Price-to-Earnings ratio of 230 in 2013 and 47.5 in 2024. If we compare these scores to currently profitable social networking companies, this is high.

Snap Inc. (forward 2024 PE) 47.5

Facebook (current PE) 35.9

Twitter (current PE) 20.12

So, given the above analysis here is the first conclusion about SNAP:

If predictions are right, and if SNAP does not find a way to accelerate its revenue or profits growth, we should not expect the price to surpass the current level by at least 2025. The question here: are you prepared to wait this long? If you believe in SNAP and plan to invest, it might be better to wait for a better price that is at least half the current price.

Next, the question is: can SNAP Inc. (SNAP) continue to grow past 2024?

If it can show EPS growth of at least 30-40% per annum for years 2025-2030 the price should more than double by 2030.

Predicted sales for SNAP in 2024 stand at $5.9 billion. Let’s compare these revenues to its competition:

Key Snap Inc. (SNAP) competitors revenues (2019, in billions dollars)
Key Snap Inc. (SNAP) competitors revenues (2019, in billions dollars)

There is clearly more room to grow to at least the current Instagram level. But can SNAP do it? Following a moment of slow addition of new users, Snapchat’s user growth accelerated in 2019. Will it continue?

Snapchat's daily active users trend 2014 to 2019 broken into North America, Europe, and Rest of the World

The growth for Snapchat comes primarily from teens. Some may say this is a good thing as Snapchat recruits teens early in their life. They may stay with the platform in their 20’s and 30’s: we have seen a similar thing with Facebook.

Chart showing that teens are increasingly have preference for Snapchat, while Twitter and Facebook is preferred by older users

However, these are not early Facebook times anymore. The number of options coming to the market every year are too many. Teens migrate from one platform to another. Check out the spike among teens in 2019 for Instagram (Facebook knows what it is doing positioning Facebook for the older crowd and attacking Snap with Instagram).

Also, no matter how Snapchat tries to recruit teens and that teens now spend 20 hours a day on social networks the reality is: users are not that important. What is important is the time they spend on Snapchat. With too many options the time teens have in a day is split across several social networks.

Also, Snapchat has a quite unique positioning which is very appealing to teens (messages are deleted shortly after they are read), but this feature is not that important for the older crowd. It is likely that teens will move to other options as they grow up.

Also, the number of options (competition) is increasing. Outside of usual social networking options below are the key Snapchat competitors

5 Best Snapchat Alternative Apps:

  1. Wickr.

  2. Slingshot.

  3. Yovo.

  4. Clipchat.

  5. Cyberdust.

Lastly, there is a problem targeting teens with ads. Right now, Snapchat is a rogue-like app allowing kids to subscribe and do whatever they want. They can lie on the application about their age. However, for the serious advertisers to continue to advertise with Snapchat this must change. There are a lot of parents out there who are worried about their kids' activity on social networks and collecting personal data about their kids.

The chart showing Snap Inc. (SNAP) may lag Facebook in revenue and earnings growth

To summarize: With extreme targeting to the younger crowd, a lot of competition Snapchat does not show as strong of growth in user base as you may think.

Is there a better alternative to Snap Inc. (SNAP) if you want to diversify your portfolio into social networks?

Having looked into available options on USA exchanges I looked at Twitter Inc. (TWTR), Facebook Inc. (FB), and Pinterest, Inc. (PINS).

And the truth is there is still a no better option than Facebook (FB).

Why Facebook Inc. (FB) is a good investment?

While Facebook had some problems with big-spending advertisers turning away from Facebook this is not the first time this is happening. Analysts predict Facebook Inc. will resume growth in the next years.

Chart showing predicted revenue and earnings trend for Facebook Inc. (FB) years 2019 to 2024
Facebook Inc. (FB) is expected to double its revenue before end of 2024. This will result in substantial growth in earnings.

The predicted EPS is expected to grow from $6.48 in 2019 to $15.63 in 2024. This represents an average growth of 20% in the next 5 years. Facebook currently has a PE ratio of 36. Combined, PE ratio and predicted growth give us a Price-To-Earnings Growth of 36/20 = 1.8. This is a bit high, as a PEG ratio of 1 is said to be good.

Chart showing predicted EPS (earnings per share) trend for Facebook Inc. (FB) years 2019 to 2024

However, if you are in this investment for a long time and believe Facebook will continue to grow past 2024 take into consideration the following: 2024 forward PE at current FB price is 14.9. If you do think Facebook Inc. will continue to grow at 20% past 2024, you should expect the price of the Facebook stock to at least double by the end of 2024.

Please keep in mind there is one big component to Facebook Inc. (FB) analysis and recommendation above: that is the word "IF". "IF" it continues to grow at the same pace past 2024. Personally, with the world changing so quickly I cannot even guess what awaits us next year. The decision is yours.

Share your thoughts about FB and SNAP in the comments section. Do you know a better investment?


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