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Facebook is starting to feel the effects of bad reputation as Snap grows faster with less drama

Published Oct 18, 2021


SNAP shares have been soaring throughout 2021, and recent stumbles by Facebook, its biggest social-media competitor, have made the stretch of outperformance even more stark.

The parent of Snapchat has gained more than 50% this year, more than double Facebook's nearly 20% advance. The gap has been especially sharp over the past month, with Snap rising about 2% as investors bet that its upcoming results will mark another quarter of robust growth. Facebook is down more than 10% over the same period, floundering amid accusations that content spread on its platforms is toxic, and prospects of tighter regulation.

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Among other social-media stocks, Twitter is up about 17% in 2021 while Pinterest has tumbled 20% on concerns over user growth.

"Snap's growth has really helped it stand apart from its peers, and it is continuing to see strong usage and engagement," said Mandeep Singh, an analyst at Bloomberg Intelligence. "At the same time, Facebook is dealing with trust issues. Because Snap is more about messaging and entertainment than sharing news, it is less tied to concerns over misinformation or corporate governance."

While Facebook is no stranger to controversy, recent news has been decidedly negative. A high-profile whistle-blower said the company puts profits over the safety of its users, and one of its earliest investors said Facebook had lost people's trust "for good reasons". Facebook's apps also suffered a lengthy outage earlier this month, during which time use of Snapchat surged more than 20%, according to Sensor Tower data.

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On Friday, Snap was little changed and Facebook fell more than 1%, even as the Nasdaq 100 Index was posting gains. A representative for Snap declined to comment. Facebook didn't immediately respond to a request for comment.

Snap's 2021 outperformance can be traced in part to February, when it forecast years of revenue increases above 50%, a target it easily exceeded in subsequent quarterly reports. The company's third-quarter results will be released on October 21, and Wall Street is looking for growth above 60%.

Facebook is a much larger company than Snap, with more than 1.9 billion daily active users, compared with 293 million for Snap in its latest quarter. Its revenue is expected to near $30 billion (about R443 bn) this quarter, compared with $1.1bn at Snap.

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Despite that larger scale, it is also a reliable growth name, with investors expecting revenue will rise more than 35% when it reports October 25. However, throughout 2021, the company has warned that changes in Apple Inc's privacy policy will be a drag.

The revisions –which restrict data collection on iPhones, diminishing Facebook's ability to sell targeted ads – contributed to the stock falling after its most recent report in July. More weakness came from a September blog post by Facebook that acknowledged the impact on advertisers was more than expected.

In a note dated October 11, Evercore ISI wrote that Apple's change had diminished Facebook's competitive advantage over peers in the digital-advertising space. "This 'leveling of the playing field' could be a benefit to alternative direct-response ad platforms like Snap and TikTok, because their relatively lower ad prices, due to less precise targeting and measurement, may now make more economic sense for advertisers," wrote analyst Mark Mahaney.

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On Friday, Mahaney added Facebook to the firm's tactical underperform list, writing that among its peers, it is facing "some of the greatest risk to Street estimates this quarter", in part because of Apple's policy.

Wall Street analysts are about equally positive on the two stocks. Facebook's consensus rating – a proxy for its ratio of buy, hold, and sell ratings – is 4.48 out of five, compared with Snap's consensus rating of 4.55.

However, the average analyst price target for Facebook points to gains of nearly 30% in the stock. The return potential for Snap is less than half that, at almost 14%.

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