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The red-hot digital advertising market is lifting the social-media sector, but some internet companies may be poised to benefit more than others.
Snap Inc.
SNAP,
and Twitter Inc.
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both posted better-than-expected financial results late Thursday, signaling that the online-advertising market is making a strong recovery from the lowest point of the pandemic, in an upbeat indicator for ad giants Facebook Inc.
FB,
and Alphabet Inc.
GOOGL,
GOOG,
which are set to post earnings next week. Snap’s report was the real standout, as the company exceeded revenue expectations by more than $100 million.
See also: Twitter earnings show large, unexpected growth in users and ad sales
Snap shares are up 24% in Friday morning trading and on track to easily close at a fresh record, while Twitter shares are up 1.4%. Facebook’s stock is ahead 3.0% in the session and Alphabet’s is up 1.8% as investors anticipate that the stronger-than-expected advertising tailwinds will materialize in the larger advertising players’ results as well.
The bigger beat and stronger stock rally for Snap indicate that more than just macro trends are at play, however, as analysts were quick to praise smart strategic moves that have driven Snap’s faster recent momentum. A few years ago, there were doubts that Snap could make a serious business out of a platform that was mainly used by young people wishing to send each other disappearing messages, but Snap now has a valuation more than twice the size of Twitter’s and the company is closing in on Twitter’s revenue totals.
MoffettNathanson analyst Michael Nathanson wrote that Snap has done a better job improving its per-user revenue, whereas Twitter “has had a hard time breaking out of its recent monetization per [daily active user] range.” Snap’s progress reflects improved returns on investments for advertisers driven by enhanced analytical tools, deeper investments in sales and marketing meant to attract advertisers, and a push into the commerce space, he continued.
“Of the two, we continue to believe that Snap is the much better long-term play given our forecast that Snap’s revenue will exceed the more tenured Twitter some time in 2022, which is remarkable given that Snap barely generated any revenues a few years ago,” Nathanson wrote. He upped his price target on Snap’s stock to $87 from $80 while maintaining a buy rating and increased his target on neutral-rated Twitter to $63 from $57.
Snap’s execution wins weren’t lost on Bernstein’s Mark Shmulik either. “We’ve run out of nice things to say on Snapchat, and this string of exceptional prints should remove any doubts about the maturity of this organization,” he wrote in a note to clients.
He’s encouraged by Snap’s progress in building out other areas of its platform beyond messaging, including through the Spotlight section, which lets users submit their own content for wider dissemination. Shmulik called out how time spent viewing content is up year over year amid better engagement with these newer functions.
“There’s a lot of content coming onto the platform – across the Discover tab, Spotlight, and gaming – which should further support engagement and creates a runway for monetization both domestically and abroad,” he wrote, while reiterating an outperform rating and boosting his target price to $85 from $80.
As for Twitter, Shmulik pointed to strength in brand advertising but highlighted continued challenges in user engagement.
“[I]t’s hard not to notice the 1 million sequential decline in U.S. users to 37 million,” he wrote. “While seasonality and reopening played a part in the decline, continued efforts around improved features (Spaces) and onboarding—now 9,500 topics to follow (up 2,500 quarter over quarter) with 41% adoption—may not be driving the desired engagement lift. Investor patience may be tested if we don’t see an inflection soon.”
Shmulik upped his price target on Twitter’s stock to $80 from $75 but kept a market-perform rating.
Another theme across the two reports was the impact of Apple Inc.’s
AAPL,
efforts to let users decide whether they wanted to allow their online activity to be tracked for marketing purposes through an advertising identifier, or IDFA. This recent initiative was flagged by social-media players as a looming headwind during the prior cycle of earnings calls, but Snap indicated this time around that it didn’t see as much of a negative impact thus far as initially anticipated while Twitter Chief Financial Officer Ned Segal said he was “pleased” by what the company had noticed to date.
Opinion: Apple’s privacy changes are affecting more than just Facebook
“Generally speaking, IDFA’s impact has been less than expected due to a slower rollout and audience upgrades,” wrote Morgan Stanley’s Brian Nowak. While he noted that both Twitter and Snap indicated some uncertainty about the future impact of IDFA as more users conduct software updates, both gave upbeat outlooks for the third quarter, “highlighting the likely small IDFA impact.”
The IDFA commentary was a “bullish” sign for Facebook as well, he continued.
Nowak boosted his Twitter target to $68 from $62 and his Snap target to $85 from $75. He has an equal-weight rating on Twitter’s stock and an overweight rating on Snap’s.
Shares of Snap have gained 250% over the past year, while Twitter shares have increased 83%, Alphabet shares have added 73%, and Facebook shares have risen 57%.
