Shares of Meta Platforms (NASDAQ: META) and Snap (NYSE: SNAP) went in opposite directions after their latest earnings reports. Meta's stock rose 5% on Aug. 1 after its second-quarter report easily cleared analysts' estimates on the top and bottom lines. Snap's stock plunged 16% on the same day as its fourth-quarter revenue landed below analysts' expectations and its adjusted earnings merely matched the consensus forecast.

Over the past three years, Meta's stock has risen nearly 40% as Snap's stock plunged more than 80%. So will the social media leader continue to crush the struggling underdog?

Which company is gaining more users?

Meta is the world's largest social media company. It ended the second quarter of 2024 with 3.27 billion daily active people (DAP) across its "family" of apps (Facebook, Instagram, Messenger, and WhatsApp), up 7% from a year earlier.

Snap carved out a niche among younger users with its ephemeral messages and augmented reality filters. Its total number of daily active users (DAUs) grew 9% year over year to 432 million in the second quarter of 2024.

Over the past year, Meta's DAP growth has remained remarkably stable -- but Snap's DAU growth decelerated and dropped to the single digits in its latest quarter. At this rate, Snap could eventually grow its daily audience at a slower rate than Meta.

Data source: Quarterly earnings reports. YOY = year over year.

Which company is generating stronger revenue growth?

Meta and Snap both generate most of their revenue from ads. But over the past year, Meta grew its revenue at a much faster rate than Snap even though it was gaining daily active users across its apps at a slower clip than Snapchat.

Data source: Quarterly earnings reports.

For the third quarter, Meta expects its revenue to rise 13% to 20% year over year while Snap anticipates 12% to 16% growth. It's usually a red flag when the underdog is growing at a slower rate than the market leader.

Meta has been growing faster than Snap because Meta is attracting more spending from Chinese e-commerce and gaming companies (which are targeting overseas consumers), simultaneously growing its ad prices and ad impressions, expanding its Reels short video platform to counter TikTok, and gathering more first-party data with its AI-powered algorithms to counter Apple 's disruptive privacy changes on iOS.

Snap didn't attract the same interest from Chinese advertisers, its Spotlight video platform didn't gain much traction against Reels and TikTok, and its ad prices fell even as its total number of ad impressions increased. Snap is also relying too heavily on its overseas users -- who generate a fraction of the ad revenues of its North American users -- to drive its DAU growth.

Which company is more profitable?

Meta is consistently profitable on a generally accepted accounting principles (GAAP) basis, even though it's subsidizing the expansion of its unprofitable Reality Labs division (which produces its VR and AR devices) with its higher-margin ad revenues. Snap is still unprofitable on a GAAP basis, and it's expected to stay in the red for the foreseeable future.

Data source: Quarterly earnings reports. GAAP basis.

For the full year, analysts expect Meta's operating margin to expand 4 percentage points to 39%, and for Snap's operating margin to improve about 12 percentage points to negative 18%. That would represent a step in the right direction for Snap, but the company is still plowing a lot of cash into buybacks to offset the dilution from its stock-based compensation. That's not a good look for an unprofitable company with negative cash flows.

Over the past five years, Snap's number of outstanding shares actually increased by 18%. Meta, which launched a $50 billion buyback plan earlier this year, reduced its number of outstanding shares by 11% during the same period.

The valuations and verdict

Meta trades at 25 times forward earnings, which makes it the second-cheapest "Magnificent Seven" stock after Alphabet . Snap can't be valued by its GAAP earnings, but it trades at 58 times forward non-GAAP earnings -- which exclude the stock-based compensation and other one-time expenses.

The choice between Meta and Snap is a simple one. Would you rather invest in the world's largest social media company, which is still growing even though it already serves about 40% of the world's population, or the niche underdog that is trying to keep pace with its nimbler competitors as it torches tens of millions of dollars each quarter? Meta's stock is also cheaper relative to its growth potential -- so it should easily stay ahead of Snap for the foreseeable future.

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