Social media has become an integral part of our daily lives. Currently, some 3.6 billion people across the globe use social media and that number is projected to increase to 4.41 billion by 2025. Further, “internet users spend an average of 144 minutes on social media per day.” These numbers are enough to trigger interest in social media stocks.
But there has been even more good news for social media companies lately. One Harvard Business Review article recently pointed out that “social media spending has increased from 13.3% of marketing budgets in February 2020 to 23.2% in June 2020 — a 74% lift.”
With the pandemic triggering an increase in time spent online, companies are re-adjusting their marketing strategies. One of the key revenue drivers for social media companies is advertising revenue. So, with those shifts in traffic and marketing budgets, social media companies stand to benefit.
That all in mind, here are seven quality social media stocks that are worth considering for your portfolio:
- Bumble (NASDAQ:BMBL)
- Snap (NYSE:SNAP)
- Zoom Video (NASDAQ:ZM)
- Facebook (NASDAQ:FB)
- Twitter (NYSE:TWTR)
- Pinterest (NYSE:PINS)
- Match Group (NASDAQ:MTCH)
Social Media Stocks to Buy: Bumble (BMBL)
First up on this list of social media stocks to consider is BMBL stock, which was listed back in Feberuary. The company operates two dating apps globally: Bumble and Badoo.
For fiscal 2020, Bumble reported 2.5 million paying users as compared to 2.1 million in fiscal 2019. Further, the average revenue per paying user (ARPPU) was $18.90.
From a growth perspective, the company reported approximately 42 million monthly active users as of third quarter of 2020 (Page 1). Therefore, with just 2.5 million paying users for the year, there is ample scope for conversion of existing users to paying users.
Furthermore, the company intends to expand into new markets. The Bumble app is in early stages of introduction throughout Europe, Asia and Latin America. Therefore, with an asset-light business model, the company has a big addressable market. It’s also worth noting that Bumble is already free cash flow positive.
For the year, Bumble has guided for revenue between $716 million and $726 million, as well as adjusted EBITDA between $173 million and $178 million. With global expansion, it’s likely that top-line growth will remain strong in the next few years. This makes BMBL stock attractive. Once paying users swell, the business has the potential to be a cash cow.
Lately, SNAP stock has been in an uptrend, having surged by 385% over the past one year. I agree that the stock looks expensive, currently at a forward price-to-earnings (P/E) ratio of 364. However, this pick of the social media stocks is worth keeping on your radar for buying on corrections.
From a top-line and cash flow growth perspective, the following point is important – Snap reported revenue of $911 million for Q4 2020. Of the total revenue, $659 million was from North America, where the company has 92 million daily active users (DAUs) (Page 13). The company’s revenue from the rest of the world (excluding Europe) was $111 million with 99 million DAUs in these regions.
So, clearly there is significant scope for user monetization in emerging economies here. The same holds true for Europe. It’s also worth mentioning that the company’s average revenue per user (ARPU) increased by 63% on a year-over-year (YOY) basis in North America. However, the global ARPU growth was 33%.
Once global user monetization improves, Snap has ample scope for cash-flow acceleration. For 2020, the company reported an adjusted EBITDA of just $45 million on revenue of $2.5 billion. However, I would not be worried about the company’s margin. In the next few years, it’s very likely that its EBITDA margin will become robust as expansion related expenses decline and ARPU continues to trend higher.
Although it’s not what you might expect on a list of social media stocks, Zoom is the next entry in this article. With the pandemic resulting in lockdowns and the work-from-home trend, ZM stock has surged over the past year.
At the beginning of 2020, Zoom was trading at about $68, but it quickly climbed with the pandemic and touched a high of $588 in October. Now, it has corrected to around $320. However, I believe this name is worth considering given the fundamental changes we’ve seen in how people work and communicate today.
In terms of growth, ZM stock is possibly among the best social media stocks. For fiscal 2021, the company reported revenue of about $2.65 billion, which was higher by 326% on a YOY basis. For this coming year, the company has guided for revenue growth of 42% to $3.77 billion.
With strong growth as well as robust cash flows, the stock is attractive. For fiscal 2021, operating cash flow was about $1.5 billion. I will not be surprised if OCF exceeds $2 billion this year.
It’s also worth mentioning that the company reported 470% growth in customers YOY. With the work-from-home trend likely continuing through the year, even with the decline of the pandemic, that customer growth should remain strong. Plus, with Zoom becoming more diversified globally, this might just be the tipping point of its growth in international markets.
Overall, ZM stock looks attractive after correction. With high OCF to free cash flow conversion, the company is well positioned to create shareholder value.
FB stock has been relatively sideways in the last six months, but it looks attractive from a valuation perspective. Right now, this pick of the social media stocks trades at a forward P/E of 26.74.
The biggest reason to be bullish on FB stock is the company’s ability to generate free cash flows. Even with regulatory headwinds last year, coupled with some advertisers pulling out, Facebook managed to report FCF of $23 billion for 2020.
Back in 2019, the company was fined $5 billion by the Federal Trade Commission. However, Facebook still generated FCF of about $21 billion. So, the company obviously has steady growth and is well-positioned to report increased FCF for this year.
Facebook has also continued to report steady upside in monthly active users. At $53.56, the average revenue per user was significantly high in the U.S. and Canada. For comparison, the ARPU for Asia-Pacific — which had the highest number of monthly active users in Q4 2020 — was just $4.05.
Of course, it’s unlikely that that region’s ARPU will be even close to the U.S. and Canada this year. However, even if the ARPU doubles for Asia-Pacific in the next few years, there will be a significant impact on FCF.
Given this potential, I am bullish on FB stock. The company’s financial flexibility even potentially allows for more big acquisitions, like when it acquired Instagram.
TWTR stock is another interesting pick of the social media stocks that seems attractive at current levels. Recently, Truist Securities analyst Youssef Squali upgraded the stock to a price target of $74. Squali’s key reason was the company’s “tangible progress on product and tech platform improvements in the last 12 months.”
However, another important factor that makes TWTR stock attractive is its growth in monetizable daily active users (mDAUs). For Q4 2020, Twitter reported 27% YOY growth in mDAUs (Page 2). For the same period last year, mDAU growth was 21%. Plus, the company believes that its new product road map can deliver even more daily utility for new and existing customers.
This in mind, it’s very likely that Twitter’s daily active users will continue to grow at a healthy pace. Therefore, as its monetizable user base increases, this social media company is well-positioned to attract more advertisers. That additional ad revenue will be a major cash-flow driver for the company.
Currently, Twitter is targeting “small and medium businesses” for ad revenue growth. In addition, the company is aiming for “non-advertising subscription-based revenue” (Page 3).
Given these plans, its top-line growth and its upside in cash flows, I am bullish on this name. At $63 today, TWTR stock looks promising.
I would be slightly cautious on PINS stock, which currently trades at a forward P/E of 93.25. However, there is no doubt that it’s one of the best social media stocks to consider on corrections.
As of Q4 2020, Pinterest reported global monthly active users of 459 million, representing 37% growth YOY. Further, the average revenue per user increased by 29% for the quarter to $1.57. If Pinterest’s MAUs and global ARPU both continue to increase, the company is surely positioned to generate some robust cash flows.
It’s also worth noting that Pinterest reported an adjusted EBITDA margin of 19% in Q4 2019. That margin improved significantly to 42% in Q4 2020. This is a clear indication of the potential the business holds in terms of upside cash flow.
Finally, Pinterest also has $1.7 billion in cash and equivalents as well as marketable securities. So, with an asset-light business model and the potential to accelerate cash flows, the company has ample cash buffer to pursue strategic acquisitions. And, with one of PINS’s key objectives being to make Pinterest “more shoppable”, it is also poised to become a proxy e-commerce growth story.
Match Group (MTCH)
Last up on this list of social media stocks, Match is a dating service company that owns the iconic Tinder brand. Tinder has a global presence and generated $1.4 billion in revenue on its own for fiscal 2020. Moreover, MTCH stock is up over 28% in the last six months and it seems that further upside is on the way.
Why? One key reason is the company’s growth and cash flows. For 2020, revenue growth was 17% on a YOY basis to $2.4 billion. The company also generated operating cash flow and free cash flow of $789 million and $746 million, respectively.
On top of that, it’s worth mentioning that Match’s global ARPU increased to 62 cents in Q4 2020, up from 59 cents in the same period a year before. The company’s growth in paying users and steady growth in ARPU implies higher cash flows.
Match Group is also likely to accelerate growth and diversify through acquisitions. For example, in February, it announced the acquisition of Hyperconnect, a “social discovery and video technology company” based in South Korea. Hyperconnect’s app, Azar, is the “highest grossing 1-on-1 live video and audio chat app globally.” The company also has an interactive live-streaming app called Hakuna.
Finally, another growth trigger for Match Group is its increased focus on high-growth markets like Southeast Asia. With a favorable demographic profile, Match can make inroads in these markets. To that end, it recently launched a Muslim-focused app called Hawaya.
Overall, MTCH stock looks attractive, with multiple growth initiatives and a big addressable market.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.