In the last quarter of 2019 Twitter Inc. (TWTR) and Snap Inc. (SNAP) traded at a similar enterprise value. However, 2020 has been a year of divergence for these two firms. As of the market close on 1/21/2020, SNAP has gained 16.4% YTD while TWTR is up only 6.4%.
Comparing enterprise value levels to total sales, SNAP currently has a multiple of 17X while TWTR has a multiple of 7X. It is clear to see that SNAP is being valued optimistically in the market right now compared to TWTR.
This optimism may not be entirely fundamentally derived, as SNAP does not yet have positive EBITDA to compare to TWTR. The chart above showcases that TWTR has been valued less and less in terms of Enterprise Value to EBITDA over the past 3 years, currently trading around 30X EV to Trailing 12-Month EBITDA.
Comparing sales and gross margins it is again TWTR that looks like the superior firm based on historical data.
To SNAP’s credit, its revenues have been growing much faster than TWTR revenues have; if this trend continues it is possible the two firms will be on a more comparable level in the years to come.
Moreover, SNAP has a larger daily active user (DAU) base than TWTR. The two graphs below were taken from Snapchat Inc. and Twitter Inc.’s latest respective quarterly reports. SNAP reported a 2019Q3 DAU average of 210M (+13% YoY) while TWTR reported a 2019Q3 mDAU of 145M (+17% YoY).2,1
However, I believe these numbers should be taken with a grain of salt. These social media firms appear to define their DAU’s in a different way. TWTR defines their metric in the following way, “Monetizable Daily Active Usage (mDAU). We define mDAU as Twitter users who logged in and accessed Twitter on any given day through twitter.com or applications that are able to show ads.”1 SNAP defines their metric in the following way, “We define a Daily Active User as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period.”2 It is unclear whether these are comparable DAU metrics. As a regular user of both services it is my personal view that the advertisements on TWTR are more effective than those on SNAP. I believe this is due to the inherent nature of the TWTR platform, from likes & retweets to hash tags & buzz words, Twitter has a lot of data it can use to target advertising or sell for analytical purposes. This opinion is seemingly supported by the historical revenue figures of both companies; advertisers have been paying up in order to not just reach eyeballs but turn those views into sales. According to an article from WARC, global advertising investment is forecast to grow 6% to $656B in 2020.5
The following data table, from Pew Research Center, highlights the demographic differences in surveyed adults social media usage across online platforms.6 The key difference between TWTR and SNAP from this data seems to be the age demographic split. According to this data, 38% of U.S. adults between 18-29 years old, 26% between 30-49 and 24% over the age of 50 report using TWTR. Alternatively, 62% of U.S. adults between 18-29, 25% between 30-49 and 12% over the age of 50 report using SNAP. From this data it seems TWTR has captured an older audience while SNAP has a much younger audience. Also of note, TWTR has more reported users in the highest income and education groupings compared to SNAP. These differences help explain how ad dollars are being allocated and reveal the dominance of Facebook and YouTube platforms across demographics.
Potential investors should ask whether it is logical to value the smaller, faster growing but not yet profitable SNAP more than the larger, slower growing and profitable TWTR. Since equity valuation is ultimately a discounted cash flow equation, the question becomes which company will earn more in the years to come, not what company has earned more in years past. According to Koyfin aggregated analyst targets, TWTR is forecasted to finish out 2019 with $3.45B in sales and $1.23B in EBTIDA; SNAP is forecasted to finish 2019 with $1.72B in sales and -$223M in EBITDA. For 2020 and 2021, TWTR is forecasted to have 14% and 13% revenue growth respectively, while SNAP is forecasted to have 37% and 31% revenue growth respectively.4 But even after those two projected years of growth, SNAP would still have revenue in 2021 that is less than what TWTR is projected to have in 2019.
Further doubt was cast on SNAP with the behemoth in social media, Facebook Inc. (which owns Facebook, Instagram & WhatsApp), copying one of SNAP’s core features back in 2018, “Snapchat Stories.”3 While SNAP has continued to grow in spite of this Zuckerberg attack, the lesson from the event did not go unheard. In my view, that event showcased that SNAP does not have a moat. Facebook can and has stolen SNAP’s features and that has placed a lot of doubt in my mind whether SNAP will survive in years to come, let alone grow at the rate analysts are forecasting. Recall Snapchat has only been in existence since 2011, Twitter launched in 2006 and Facebook was founded back in 2004. I don’t believe the staying power of SNAP has been established yet, nor do I think the valuation makes sense compared to TWTR which is why as of the writing of this post, I am long TWTR and short SNAP.
Disclosure: I am long FB & TWTR and short SNAP as of 1/22/2019.