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6 Top Social Media Stocks to Watch on the Dip

Mark Reeth

Social media stocks navigating the health crisis.

Social distancing during a global health crisis has not been easy, but the companies that keep us connected to one another from afar are reaping rewards from users desperate to keep in contact with friends and family. Social media companies across the board have enjoyed record usage over the last few months thanks to people trapped inside their homes looking for an escape. Yet an increase in users doesn't necessarily mean higher profits for these companies, and though their balance sheets may look good today, there are problems brewing on the horizon. How has the pandemic changed these six social media companies, and what does the future hold for social media stocks?

Facebook (ticker: FB)

Facebook has tried to rebuild its reputation by banning ads for fake personal protective equipment, establishing an information center about the virus, and providing free communications software for emergency services through its Workplace for Good program. That would at least partly explain how, in its last earnings report, FB cited year-over-year increases of 11% in daily active users, or DAUs, and 10% in monthly active users, or MAUs. That good news was offset by the company's note that it has "experienced a significant reduction in the demand for advertising," and considering 98% of the company's revenue last quarter came from advertising, that doesn't bode well for future earnings. Still, while a global outbreak is never a good thing, it may prove to be a turning point for Facebook.

Twitter (TWTR)

As another of the top social media stocks to watch, Twitter has enjoyed a huge surge in usage during the crisis. Monetizable DAUs jumped 24% year-over-year in Q1 as people log in to check for updates from health authorities, the federal government and their favorite celebrities. Minute-by-minute updates and instantaneous communication may be great for well-intentioned users, but to combat misinformation, Twitter has created a labeling system to identify misleading outbreak content. That's extremely important to society, but business-wise, Twitter must turn its attention to advertising -- ad revenue declined 27% year-over-year between March 11 and March 31 as companies tighten their purse strings heading into a recession. More people on the platform might be nice, but without advertisers to monetize those users, TWTR may not be able to capitalize on its recent success.

Snap (SNAP)

In its Q1 earnings announcement on April 21, Snap revealed that DAUs had increased 20% year-over-year, and the average time spent on Snapchat increased 20% from the last week of January to the last week of March. In addition, unlike some other social media stocks, Snap saw revenue increase dramatically alongside users, with first-quarter sales up 44% year-over-year. The company saw lower revenue growth in March when much of the world was locking down, with the majority of growth coming in the first two months of the year. This suggests natural growth that should continue when the crisis passes. Snap's audience includes more than 90% of young people aged between 13 and 24 in the U.S., and with user engagement reaching new heights, Snap is well-positioned among social media stocks for future growth.

Pinterest (PINS)

Pinterest's focus is less on connectivity and more on helping users find new do-it-yourself projects, fashion ideas, recipes and more, making it uniquely positioned to provide people stuck at home with some much-needed inspiration. The result has been a 26% increase in MAUs, leading to a 35% increase in revenue, according to the company's first-quarter earnings. Unfortunately, an increase in users hasn't translated to a stronger bottom line -- Pinterest lost 10 cents per share last quarter, and the company noted that "our cost of revenue has generally grown with users rather than revenue, which in this environment puts some pressure on gross margins." If PINS can manage to get costs under control while retaining its new users, investors should pin their hopes on this company. Until then, it may be best to look elsewhere.

Zoom (ZM)

Zoom, the online collaboration tool, was originally meant to connect remote employees, but Zoom's ease of use and fun features have made it the go-to videoconferencing app for anyone trapped at home. The results speak for themselves: In December, Zoom had 10 million daily users -- by April 1, it had 200 million, and by the end of April, it had 300 million. While Zoom has clearly benefited from the spotlight the lockdown has cast on it, there have been drawbacks as well -- the company came under fire due to privacy concerns and was forced to halt all product development for 90 days to focus entirely on beefing up software security. Despite that, the future looks bright for Zoom. In a world where video is king, Zoom could very well find itself at the center of a new type of social network.

Tencent (TCEHY)

While the rest of the market reels from the effects of the outbreak, shares of Tencent have recently reached a 52-week high. Tencent's success is partly thanks to the diversity of products the Chinese company offers -- Tencent Video and Tencent Music are successful businesses in their own right, its cloud and fintech services continue to expand, and its gaming division makes Tencent the world's largest video game publisher. But the core of Tencent's business is WeChat -- with more than 1.15 billion users, it is the most popular chat app in China. The app ecosystem Tencent has built into WeChat rivals Apple's App Store, and while the advertising revenue Tencent gets from WeChat will almost certainly decrease this quarter thanks to the virus, its other businesses should be more than enough to bolster the company's bottom line.

Social media stocks to watch in 2020.

-- Facebook (FB)

-- Twitter (TWTR)

-- Snap (SNAP)

-- Pinterest (PINS)

-- Zoom (ZM)

-- Tencent (TCEHY)



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