The internet industry is dynamically evolving, propelled by transformative shifts such as immersive experiences driven by generative AI, expanding user bases, burgeoning e-commerce, and government initiatives advocating extensive connectivity, collectively shaping a landscape of innovation and progress.
Recognizing the considerable potential in the internet industry, I evaluated Meta Platforms, Inc. (META) and Snap Inc. (SNAP) to identify the internet stock poised for superior returns. Before delving into the featured stocks, let's examine the influential factors molding the internet landscape.
The internet has transitioned from static websites to a dynamic, social, and mobile web, embracing immersive experiences. Prioritizing heightened connections and user engagement, the evolution resonates with evolving preferences, positioning the internet sector for heightened vitality and sustained long-term success.
The advent of the "immersive internet" signals the next phase of online evolution, surpassing static content to foster interactive collaboration. Augmented Reality (AR) and Virtual Reality (VR) are playing a pivotal role in crafting a dynamic, participatory online environment, delineating this transformative era beyond conventional web experiences.
Furthermore, the rise of generative AI bodes positively for the internet sector, anticipating an elevation in user experiences through its capacity to generate environments and assets automatically. Gartner (IT) forecasts that by 2026, generative AI will redefine 70% of new web and mobile app design and development processes.
That being said, internet users continue to surge, reaching 5.30 billion globally in the early fourth quarter of 2023, comprising 65.7% of the world’s population. Presently, 4.95 billion individuals worldwide participate in social media, with projections foreseeing an increase to 5.17 billion by the conclusion of 2024.
Persistent trends indicate that two-thirds of the global population will be online by mid-2024, highlighting the pervasive and expanding reach of the internet. Both META and SNAP are expected to capitalize on the industry’s developments.
In terms of price performance, META has gained 10.2% over the past month, while SNAP plummeted 6.1% during the same period. However, META witnessed a 29.5% gain over the past three months, while SNAP surged 58.7% over the same duration.
Additionally, META climbed 62.3% over the past nine months, closing the last trading session at $390.14, whereas SNAP skyrocketed 82.4% during the same period, closing the last trading session at $15.89. But which Internet stock could be a better pick? Let's find out.
Recent Financial Results
For the fiscal 2023 third quarter that ended September 30, 2023, META’s revenue increased 23.2% year-over-year to $34.15 billion. Its income from operations rose 142.7% from the year-ago value to $13.75 billion. Additionally, the company’s net income and EPS grew 163.5% and 167.7% from the prior year’s period to $11.58 billion and $4.39, respectively.
For the fiscal 2023 third quarter that ended September 30, 2023, SNAP’s revenue increased 5.3% year-over-year to $1.19 billion. However, its adjusted EBITDA declined 44.8% from the year-ago value to $40.09 billion. In addition, non-GAAP net income decreased 77.8% from the prior year’s period to $29.25 million, while non-GAAP income per share declined 75% year-over-year to $0.02.
Past and Expected Financial Performance
Over the past three years, META’s revenue and EBITDA increased at a CAGR of 17.1% and 15.4%, respectively. Its normalized net income and EPS grew at respective CAGRs of 14.6% and 8.8%. Moreover, the company’s tangible book value and total assets grew at a CAGR of 7.4% and 13.9%, respectively, over the same time frame.
The consensus revenue estimate of $133.70 billion for the fiscal year that ended December 2023 reflects a 14.7% year-over-year rise. Similarly, the company is expected to report an EPS of $14.39 for the year, reflecting a 67.6% increase from the previous year.
SNAP’s revenue rose at a CAGR of 28.2% over the past three years. Also, its total assets increased at a CAGR of 17%. However, the company’s tangible book value and levered free cash flow declined at CAGRs of 21.8% and 3.4%, respectively, over the same time frame.
For the fiscal year that ended December 2023, analysts expect the company’s revenue to grow $4.62 billion, indicating a marginal year-over-year increase. However, the company’s EPS for the same period is expected to decline 55.7% from the previous year to $0.08.
Valuation
In terms of trailing-12-month Price/Book, META is trading at 7.20x, 33.5% lower than SNAP, which is trading at 10.83x. Additionally, META’s trailing-12-month Price/Cash Flow of 15.53x is 88.1% lower than SNAP’s 130.85x.
Thus, META is more affordable.
Profitability
META’s trailing-12-month revenue is 28 times that of what SNAP generates. Moreover, META is more profitable, with a trailing-12-month gross profit margin of 80.12% compared to SNAP’s 56.70%.
In addition, META’s trailing-12-month EBITDA margin and trailing-12-month net income margin of 42.58% and 23.42% compare with SNAP’s negative 26.84% and negative 29.99%, respectively.
Hence, META is more profitable.
POWR Ratings
META has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. Conversely, SNAP has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. META has a B grade for Sentiment, supported by optimistic analyst estimates. In contrast, SNAP has a D grade for Sentiment, reflecting its unfavorable analyst outlook.
Moreover, META has an A grade for Quality, justified by its profitability surpassing industry standards. Its trailing-12-month levered FCF margin of 23.19% is 204.4% higher than the industry average of 7.62%. Also, its trailing-12-month cash from operations of $66.22 billion compares with the industry average of $300.75 million.
Conversely, SNAP has a D grade for Quality, aligning with its disappointing profitability metrics. The stock’s trailing-12-month levered FCF margin and trailing-12-month cash from operations of 5.34% and $207.24 million are 29.9% and 31.1% lower than the industry averages of 7.62% and $300.75 million, respectively.
Of the 53 stocks in the Internet industry, META is ranked #2, while SNAP is ranked #52.
Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, and Stability. Click here to view META’s ratings. Get all SNAP ratings here.
The Winner
The rise of immersive internet technologies such as AR and VR, coupled with advancements in generative AI, is reshaping online interactions. This trend, along with the increasing global internet user base, is creating a fertile ground for industry-wide expansion, presenting opportunities for META and SNAP.
However, META stands out as a more attractive investment option than SNAP due to its superior financial performance and heightened profitability.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Internet industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
META shares were trading at $395.85 per share on Thursday afternoon, up $5.71 (+1.46%). Year-to-date, META has gained 11.83%, versus a 2.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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