Three Social Media Stocks to 'Like' in Your Portfolio

While the demand for advertising is on a rebound, beware of high valuations while the pandemic is in full swing.
Anthony RussoOct 13,2020,21:33

The Covid-19 outbreak has caused many social media platforms to suffer weakened advertising revenues. However, the industry is starting to recover. What does that mean for stock traders?

In the second quarter, the average cost-per-click for paid ads surged 55% globally, according to a report from social media marketing platform Socialbakers. The increase came despite the Facebook (Nasdaq: FB) boycotts and social movements amid the George Floyd protests including #BlackoutTuesday.

While shares of social media operators have had their share of volatility this year, some stocks have been on a tear recently. Let’s take a look at these social media stocks.

Twitter Chirps to 5 1/2 Year High After Upgrade

One of the hottest stocks in the social media space right now is Twitter (NYSE: TWTR).

Since late September, Twitter has been a strong gainer. On Monday, it leaped to a five-and-a-half-year high after getting a "buy" upgrade from Deutsche Bank. Analyst Lloyd Walmsley, who raised his price target on the stock from $36 to $56, noted his earlier bearishness was due to poor advertising channel feedback—but that has now changed. Walmsley was sanguine on a few other social media players on Monday as well.

“In our view, Twitter is well positioned to benefit from a big event landscape in 2021, expansion into more performance advertising on the back of its ad server rebuild and new MAP [mobile app promotion] product, and an eventual high-margin subscription product,” Walmsley wrote in a note to clients.

He added, “We are now starting to hear more positive feedback in the ad channel and would take advantage of the opportunity to build a position now before a stronger ad recovery takes hold and we get into the period of 2021 excitement.”

While Twitter has been hurting from lower advertising revenue—it has shown its ability to attract users during the pandemic. In the second quarter monetizable daily active users soared to 186 million, up 34% from the same period a year ago.

Whether Twitter will be able to narrow its losses in the third trimester is under question. In the second quarter, Twitter’s net loss topped $1.23 billion on an adjusted loss of 16 cents a share, which missed analysts’ expectations of a breakeven per-share result.

That said, I would look to buy the stock at around $45 per share.

Shares of Twitter have risen 18% since Sep. 21.

Facebook Is a Solid Long-term Buy

Facebook has also joined the gainers rally. Since its close on Sept. 21, shares of Facebook are up 11%.

Deutsche Bank’s Walmsley was also bullish on Facebook on Monday and raised his price target to $325 from $305.

Some are concerned with Facebook following the social unrest in the U.S. after the murder of George Floyd. Although major firms including Coca-Cola (NYSE: KO) and Verizon (NYSE: VZ) have paused advertising spending on the social media giant, Facebook is unlikely to see its revenues take a major hit.

Wedbush analysts said in late August that they expect “minimal financial impact from brand boycotts” and that it anticipates $100 million “near term brand revenue is at risk,” which represents less than 1% of year-over-year revenue growth in the third quarter, as cited by CNBC.

Another concern with Facebook, which operates WhatsApp and Instagram, is its overly high valuation, considering it was a victim of a big tech sell-off earlier last month. While it trades around 34 times its earnings, it has earned some strong stock market appreciation in the last half-decade.

In the short term, I would say hold and wait for the stock to fall to $250 per share before buying. But Facebook should be a safe bet for your investment portfolio in the long run.

Snap Wins the Heart of American Teens But Remains Risky

Another social media stock to consider is Snap Inc. (NYSE: SNAP), which controls the popular multimedia messaging app Snapchat.

Some may think TikTok, owned by Chinese parent ByteDance, would win over the hearts of American teenagers—but that may not be the case. Instead, that crown belongs to Snapchat, according to a recent survey posted by the investment firm Piper Sandler (NYSE: PIPR) that polled 9,800 U.S. teens. The polling showed that 34% of the participants ranked Snapchat as their No. 1 social media platform, while 29% said TikTok was their favorite.

Snapchat has also been growing at a fast pace. In the second quarter, its daily active users soared 17% to 238 million—representing the fourth straight quarter of double-digit growth.

The one problem with Snapchat’s parent is profitability. In fact, since its IPO in March 2017, Snap has yet to show profit. In the second quarter, Snap’s net loss widened to $326 million versus $255 million in the same period in the preceding year.

Not that this would come as a huge surprise, but analysts are expecting its bottom line to stay in the red when Snap posts its financials next week. Meanwhile, analysts are expecting Snap's revenue to jump 23% in the third quarter.

With shares of Snap already up 62% year-to-date, I would hold for now. But keep an eye on the stock when the company reports its third-quarter financials next week.

Walmsley also boosted his price target on Snap from $28 per share to $32 per share on Monday.

While advertising is starting to rebound for social media platforms, valuations remain high right now amid the coronavirus crisis.

Putting aside the high valuations, buying these stocks now could mean a good opportunity for the long term.

“We are bullish on the [social media] space into 2021, where a continued cyclical recovery and easy comps will drive accelerating growth and margin recovery, with potential for more share gains across online advertising,” Walmsley said.

So, expect another sell-off around the election regardless if another fiscal stimulus package passes by then. In the long run, Twitter and Facebook are likely to post gains, while Snap’s failure to generate probability is concerning.

Topics:Twitter, Facebook, Snapchat, ByteDance, TikTok