I believe you should buy stocks right now, and I'll support this position with insights from people far more qualified to walk us through this than I am.

With so much uncertainty in the world and in the economy, I know that now can seem like a poor time to invest. But stock pickers could be in a more advantageous position now than they've been for over a decade.

Bull market geniuses or ducks in the rain?

From March 2009 through the end of 2021, the S&P 500 was up over 500%. The march upward only had a couple of brief interruptions, as this chart shows.

^SPX data by YCharts.

If you were buying and holding stocks during this period, it was almost difficult to lose money.

It reminds me of something Berkshire Hathaway Inc.(NYSE: BRKB) CEO Warren Buffett once said. Referencing Berkshire's 34% gain in 1997 in his letter to shareholders, Buffett wrote: "Last year's performance was no great triumph: Any investor can chalk up large returns when stocks soar, as they did in 1997. In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world." 

To restate Buffett's point, almost all investors look like geniuses in a bull market because stocks are going up everywhere -- just buy something. And this is partly due to the broader economy, since there's a strong correlation between that and the market. When the economy is strong, many businesses do well and their stocks go up.

However, we are entering a whole new world in 2022. The U.S. economy has declined for two consecutive quarters. And things could slow further because of the Federal Reserve, as it raises interest rates to combat inflation. As Fed Chairman Jerome Powell recently said, "Reducing inflation is likely to require a sustained period of below-trend growth."

According to Powell, increasing interest rates will continue to slow the economy. But it's also causing the cost of capital to increase, hurting businesses that need financing. 

The clock is ticking (for some)

The situation I've described is real. Even companies that have historically burned cash, like Snap Inc.(NYSE: SNAP), are pivoting. When it comes to profits, CEO Evan Spiegel recently said, "We must adapt our strategy accordingly." For this reason, the company is making several changes, including trying to better monetize its augmented-reality (AR) technology by launching an enterprise business.

But many unprofitable companies won't be able to adapt. The dot-com bubble more than two decades ago was a similar situation. The market hit its high in early 2000, but the writing was already on the wall. Talking to Forbes at the time, Ron Sege, then the Lycos CEO, said, "There is a certain sense of desperation and anxiety." Specifically, Sege was talking about insiders' desire to cash out and leave their companies in light of market conditions.

Insiders want out when their ability to generate shareholder value goes down. I believe that's the case right now for structurally unprofitable companies in light of changing economic conditions. As Etsy, Inc.(NASDAQ: ETSY) CEO Josh Silverman recently said, "I think we're going to see a reckoning." The torrential rain for Buffett's ducks is over.

However, if you're thinking about waiting to buy stocks until the shakeout is over, that might not be the best idea. The stock market looks ahead, and it sometimes starts recovering from rock bottom before the economy improves. So unless you know exactly when the economy will recover (you don't), you risk missing the stock market bottom.

^SPX data by YCharts.

To summarize up to this point, bull markets produce stock winners everywhere. Bearish market conditions like right now prioritize profits and disproportionately hurt weaker companies. And finally, timing the market bottom isn't easy. Now, here's what to do with this information.

The strong will get stronger

Sequoia Capital's Alfred Lin recently wrote in a presentation, "The slower growing companies that were doing it profitably now have the financial flexibility to take advantage of the pullback from cash burning companies." 

It's like what Motley Fool contributor Brian Stoffel says with his Antifragile Framework for investing: Stocks that are antifragile "get stronger when stress is applied." In other words, the present situation is going to be a long-term benefit for a handful of companies. And if you can identify these opportunities while the market is down, it can lead to some market-crushing results, which is why I believe now is a great time to still be buying stocks.

For instance, investors might take a look at PayPal Holdings, Inc. (NASDAQ: PYPL) stock. With so many unprofitable financial-technology companies out there, PayPal could be in a position of strength. The company has already curtailed spending to boost profits. And at a conference on Sept. 12, CEO Dan Schulman said that earnings per share (EPS) for the current quarter were "coming in a bit stronger than expected." And it's pivoting to greater profitability while still maintaining revenue growth north of 10%. 

Image-browsing app Pinterest (NYSE: PINS) and advertising-technology company PubMatic, Inc. (NASDAQ: PUBM) are two more businesses that can still thrive in the current market. Both companies are debt-free, are in cash-rich positions, and generate positive cash from operations, as this chart shows.

PINS total long-term debt (quarterly). Data by YCharts.

Granted, both Pinterest and PubMatic generate revenue from ads. And the advertising industry will likely struggle in a slowing economy. But that's kind of the point. As Lin said, these two have the financial flexibility to grab market share from cash-burning rivals.

In conclusion, investors will need to be more discerning than ever when picking stocks in 2022 and beyond. There are lots of problems, and many businesses will consequently be permanently impaired.

However, this will create amazing long-term opportunities for a select group of companies that I believe will result in life-changing gains over the years to come. I might not accurately identify all of these stocks. But it's why I want to be picking stocks now more than ever.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Should you really buy stocks now or wait a while longer? appeared first on The Motley Fool Australia.

Technology shares in the red on Monday include Xero Ltd (ASX: XRO), Wisetech Global Ltd (ASX: WTC), and Block Inc (ASX: SQ2).

Let's take a look at why ASX tech shares are down.

Technology shares fall

The Block share price is down 3.82% at the time of writing, while Xero shares are 1.5% lower. Meanwhile, the Wisetech Global share price is 1.04% in the red.

ASX 200 tech shares are suffering after the technology-heavy NASDAQ dropped 1.87% in the US on Friday. Meta Platforms Inc (NASDAQ: META) shares also tumbled 7.59% on Friday while the Apple Inc (NASDAQ: AAPL) share price fell 0.81%.

The S&P/ASX All Technology Index (ASX: XTX) is 1.8% in the red today, while the S&P/ASX 200 Information Technology Index (ASX: XIJ) is down 1.14%.

The NASDAQ fell after social media giant Snap Inc's (NYSE: SNAP) quarterly earnings spooked investors, Reuters reported. Snapchat shares fell 39% on Friday on the back of these results.

In a letter to shareholders, Snapchat said:

We are not satisfied with the results we are delivering, regardless of the current headwinds

Meanwhile, Verdence Capital Advisors chief investment officer Megan Horneman highlighted that economic growth was "slowing significantly". In comments cited by Reuters, she said:

Economic data is coming in weaker.. kind of confirming the fact that a recession is highly likely over the next 12 months.

Block's US listing also dropped 3.96% on the New York Stock Exchange on Friday.

The post Why are ASX 200 tech shares having such a lousy start to the week? appeared first on The Motley Fool Australia.

What happened

A day after Snap (NYSE: SNAP) plunged 43% on a guidance cut, the social media stock was bouncing back as investors seemed to spy an opportunity in the sell-off. 

As of 12:22 p.m. ET today, the stock was up 9.8%. 

So what

On Monday night, Snap issued a filing saying it now expected second-quarter revenue and EBITDA to come in below the bottom end of its previous guidance due to a deteriorating macroeconomic environment. In other words, the company now expects revenue growth of less than 20% in the second quarter, and to report an EBITDA loss for the quarter. 

That warning was enough to sink the whole tech sector yesterday with a number of digital advertising stocks falling double digits. However, today investors seemed to spy a buying opportunity in Snap stock, and it's easy to see why.

If Snap's argument about macro conditions is correct, then a 43% sell-off in the stock seems excessive. The company isn't losing market share and its long-term growth plans are still intact. However, there are a number of signs that the overall economy is decelerating. The Federal Reserve is aggressively raising interest rates. Inflation is at a 40-year-high, and a number of tech companies have announced layoffs or hiring freezes.

After yesterday's plunge, the stock trades at a price-to-sales ratio of just five, the cheapest it's been since it went public.

Now what

Advertising is cyclical, so it makes sense that companies like Snap would see demand falling in a weakening economy. However, the overall business still looks solid as it continues to grow its user base and remains popular with teens even as TikTok has grown.

While the next few quarters could be tough for Snap, there's a decent chance the stock could be significantly higher in a few years. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Snap shares were bouncing back today appeared first on The Motley Fool Australia.

Snap (NYSE: SNAP) stock plunged in dramatic fashion on Tuesday, losing more than 43% of its value overnight. The catalyst that caused shares to crumble was a warning that the company's second-quarter results would come in below its previously issued guidance, released just a month ago.

Factoring in today's decline, Snap -- the parent of social media site Snapchat -- has now lost a stunning 84% from highs reached just last fall. Given its remarkable fall from grace, is Snap stock a buy?

Context matters

As with so many things, the answer won't be the same for every investor but, in a case like this, context is important.

In a regulatory filing late Monday, Snap revealed that prevailing economic forces had turned south and the company was unlikely to live up to its previously released forecast.

"Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated," the company said in a statement. 

A look at Snap's recent results suggests that the company was facing tough comps related to its pandemic-fueled growth last year. For the first quarter (ended March 31), Snap generated revenue of $1.06 billion, up 38% year over year (on top of 66% growth last year). At the same time, the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) swung to a positive, while its operating and free cash flow came in at $127 million and $106 million, respectively. 

Snap was guiding for year-over-year revenue growth in a range of 20% to 25% and adjusted EBITDA of between breakeven and $50 million. Now, however, the company is suggesting it won't be able to deliver on those more modest returns.

Other metrics, however, suggest that its growth will continue, albeit at a slower pace. Daily active users of 332 million grew 18% year over year, while users engaged with Snaps Places and Snap Map offerings at twice the rate of the prior-year quarter.

History suggests that advertising is among the first things to go when companies rein in spending and the current downturn will likely be no different. Given Snap's growing user base and increasing engagement, however, the stock looks like a steal at current levels even if it takes some time for the market to recover.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Is Snap stock a buy after its spectacular fall from grace? appeared first on The Motley Fool Australia.

While the ASX 200 is up 0.5% the S&P/ASX All Technology Index (ASX: XTX), which also contains some companies outside of the top 200 by market cap, is going the other way.

At the time of writing the All Tech index is down 2.1%.

Some of the heavier losses among ASX 200 tech shares are being posted by global payments giant, Block Inc (ASX: SQ2). The Block share price is down 5.9% to $108.80. This comes after its US listed shares tumbled 9% yesterday (overnight Aussie time).

Also in the red is accounting software provider Xero Limited (ASX: XRO), down 1.1%.

And WiseTech Global Ltd (ASX: WTC), which provides cloud-based software solutions for the logistics sector, is down 2.9% to $39.98 per share.

So why are tech companies coming under pressure?

What's happening with the technology sector?

ASX 200 tech shares look to be following the lead of the Nasdaq.

The tech-heavy US index fell 2.4% yesterday, taking its year-to-date losses to 29.8%.

Growth shares the world over have come under pressure in 2022 amid rising interest rates and fears of a recession in the United States, the world's biggest economy.

Yesterday's hit to US tech shares was driven by a global social media provider, Snap Inc (NYSE: SNAP). Snap reported that macroeconomic conditions were deteriorating and lowered its profit forecast with its digital advertising revenue likely to come under pressure.

The Snap share price crashed 43% by market close.

Ouch.

The carnage at Snap hit most every big US tech share, with Alphabet (NASDAQ: GOOGL) – or Google if you prefer – dropping 5%.

And now ASX 200 tech shares are feeling the headwinds.

How have ASX 200 tech shares done in 2022?

With the RBA and central banks in many other nations lifting their benchmark interest rates for the first time in a decade this year, with more rate hikes flagged, growth stocks like ASX 200 tech shares have largely lost ground.

Year to date the All Tech index is down 32.8%, compared to a loss of 5.3% posted by the ASX 200.

The post What's happening with ASX 200 tech shares today? appeared first on The Motley Fool Australia.

What happened

Shares of Snap Inc (NYSE: SNAP) plummeted on Tuesday, falling as much as 40.7%. As of 10:48 a.m. ET, the stock was still down 40.4%.

The catalyst that sent the social media company plummeting was a profit warning that set off alarm bells about the state of the economy.

So what

In a regulatory filing after the market close on Monday, Snap -- the parent of Snapchat -- warned that the economic picture had become much more uncertain, causing the company to rein in both its revenue and profit guidance for the second quarter.

In a statement, the company said:

Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated. As a result, we believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range.

Management went on to say that the company remains "excited" about the "long-term opportunity" ahead. "Our community continues to grow, and we continue to see strong engagement across Snapchat, and continue to see significant opportunities to grow our average revenue per user over the long term."

Now what

Following the profit warning, analysts scrambled to adjust their models to fit the changing economic paradigm. There was a raft of outlook adjustments, as no fewer than a dozen of Wall Street's finest lowered their price targets on Snap.

Perhaps more telling, however, was the fact that none of the analysts downgraded Snap's stock, which is decidedly bullish. Truist analyst Youssef Squali's take was the most upbeat, telegraphing a long-term view.

He pointed out that while the outlook is disappointing, he expects the situation to be temporary, according to The Fly. He cited the company's strong fundamentals and the increasing adoption of its first-party data measurement by advertisers. Squali also said that the growing adoption of Snapchat products by its users, including Map and Spotlight, as well as the continuing growth of its daily active users as signs that the current situation is transitory. 

Taking a long-term view is difficult on days like today, but given the growing opportunity and underlying strength of its business, Snap investors will likely look back on today as a chance to buy shares on the cheap.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Snap stock cratered on Tuesday appeared first on The Motley Fool Australia.

The S&P/ASX All Technology Index (ASX: XTX) is falling 2.46% at the time of writing to 2,093.9 points. For perspective, the S&P/ASX 200 Index (ASX: XJO) is down 0.04% today.

Let's take a look at what could be impacting ASX 200 tech shares.

ASX tech shares fall

ASX 200 tech shares Block Inc (ASX: SQ2) and Xero Limited (ASX: XRO) are falling 6.1% and 2.2% respectively today. Meanwhile, WiseTech Global Ltd (ASX: WTC) is down 2.3% and TechnologyOne Ltd (ASX: TNE) has shed 1.8%.

ASX technology shares could be reacting to news from the United States. Technology shares on the ASX often follow the trends of US counterparts.

The Snap Inc (NYSE: SNAP) share price has plunged more than 31% in after-hours trading on the New York Stock Exchange.

In a US Securities and Exchange Commission filing, Snapchat advised it would likely miss its revenue and earnings before interest, taxes, depreciation, and amortisation (EBITDA) targets.

Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated. As a result, we believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range. 

This news appeared to impact overall sentiment in the sector, with many of Snap's peers falling after hours, as the CNBC noted.

Nasdaq Futures are falling 1.30% at the time of writing. Meta Platforms Inc (NASDAQ: FB) shares plunged 7% in after-hours trading, while Twitter Inc (NYSE: TWTR) shares dropped 3.72%, Pinterest Inc (NYSE: PINS) fell nearly 12% and Trade Desk Inc (NASDAQ: TTD) slid nearly 9%.

Closer to home, TechnologyOne shares plunged nearly 5% in earlier trade before recovering slightly to the current share price of $10.22. As my Foolish colleague James reported today, the ASX 200 tech share reported strong first-half growth. Total revenue jumped 19% to $172.5 million, while profit after tax leapt 18% to $33.2 million.

Share price snapshot

The All Technology Index has dived nearly 20% in the past year, while it is plunging nearly 30% year to date.

In the past month, the index has fallen 11%, while it is virtually flat over the past week.

For perspective, the benchmark ASX 200 has climbed 1.5% in the past year.

The post Here's why ASX 200 tech shares are under pressure on Tuesday appeared first on The Motley Fool Australia.

But looking at after-hours trading, a very different picture emerges. Instead of a 4% rise, Apple was down 1.34%. Tesla went from a 1.66% rise to a 2.65% fall. And Meta Platforms Inc (NASDAQ: FB), the company formerly known as Facebook, went from a 1.4% gain to a loss of 7.1%. So what happened after hours that caused such a dramatic turnaround?

Well, it appears to be the fortunes of Snap Inc (NYSE: SNAP), the social media company behind Snapchat, that seems to be the catalyst here.

Snap share price plunge makes for a less than pretty picture for the Nasdaq

Snap stock suffered a nasty fall of 3.4% to US$22.47 a share yesterday during normal trading, but plunged by almost 31% in after-hours trading to US$15.51 a share. That represents the lowest level Snap shares have been at since April 2020.

This after-hours plunge in Snap's value seems to have been sparked by an SEC (US Securities and Exchange Commission) filing. The filing stated the following:

Since we issued guidance on April 21, 2022, the macroeconomic environment has deteriorated further and faster than anticipated. As a result, we believe it is likely that we will report revenue and adjusted EBITDA below the low end of our Q2 2022 guidance range.

We remain excited about the long-term opportunity to grow our business. Our community continues to grow, and we continue to see strong engagement across Snapchat, and continue to see significant opportunities to grow our average revenue per user over the long term.

According to reporting from CNBC, Snap CEO Evan Spiegel also sent a note to employees. Here's some of what that reportedly said:

Today we filed an 8-K, sharing that the macro environment has deteriorated further and faster than we anticipated when we issued our quarterly guidance last month… As a result, while our revenue continues to grow year-over-year, it is growing more slowly than we expected at this time.

Nasdaq heading for a nasty Tuesday

This was clearly the last thing the markets wanted to hear at this time. Snap's after-hours plunge looks to have taken the wind out of many other US tech shares' sails. Companies in Snap's space, such as Meta, Twitter Inc (NYSE: TWTR) and Pinterest Inc (NYSE: PINS) were hit the hardest. Indeed, most US tech shares that finished last night's session in the green subsequently went red in after-hours trading.

According to Bloomberg, futures for the Nasdaq 100 are now pointing to a drop of 1.3% for the tech-heavy Nasdaq. Although Snap isn't a Nasdaq share, many other US tech shares are. So it seems we have the Snap share price to thank for what is shaping up to be anther painful session of trading on the Nasdaq tonight.

The post Snapchat share price dives 30% pulling Nasdaq futures lower appeared first on The Motley Fool Australia.

Social networking in the digital realm has evolved rapidly over the last 15 years. What began on our computer screens quickly found its way onto our smartphones, allowing us to connect with our family, friends, and colleagues anywhere, at any time. 

The next iteration of this networking is now in development. It's called the metaverse, and it's a virtual world (or worlds) accessible through more immersive devices that will take users to the next level within digital social networks and allow much more interaction than is currently possible.

It's estimated that this exciting technology could be worth up to $1.6 trillion annually by the end of the current decade. It's a sizable opportunity for the innovative companies developing the metaverse, with lots of entrants vying for a competitive edge. Wall Street is betting these two stocks could be at the forefront of this new competition.

1. Meta Platforms: Forecasted upside of 132%

Formerly known as Facebook, Meta Platforms (NASDAQ: FB) is by far the leader in the social media industry. With over 2.9 billion monthly active users, it's arguably the best-positioned company to build the next generation of the digital social experience. And while that happens, investors get the benefit of owning highly profitable assets like Instagram, WhatsApp, and Facebook.

But it hasn't been smooth sailing lately. Meta Platforms stock price has suffered a steep 41.2% decline since the company reported full-year 2021 earnings on 2 February. Meta is struggling to navigate user privacy changes by iPhone maker Apple (NASDAQ: AAPL), which have affected Meta's ability to target advertising toward specific users. Meta estimates the changes could result in $10 billion in lost revenue in 2022, which has made investors nervous.

Meta's Reality Labs segment, which is tasked with developing the metaverse, also raised eyebrows in the investment community after reporting a loss of $10 billion in 2021. But given the size of the opportunity ahead, that could prove to be a drop in the bucket over time. Meta is trying to build the foundations of this technology, which could give it control (and pricing power) over the transactions that occur within it. Owning the ecosystem in that fashion could be an enormous financial windfall, especially if the metaverse supports its own digital economy. 

That raises an important point: Analysts expect Meta to generate $132 billion in revenue during 2022, which would represent a compound annual growth rate of 38% over the last decade. Put simply, the company is a financial powerhouse, and its investments in Reality Labs so far certainly won't break the bank. 

In light of the stock's steep decline, Meta Platforms now trades at a price-to-earnings multiple of just 14, based on 2021 earnings per share of $13.77. That multiple is 55% cheaper than the multiple for the tech-centric Nasdaq 100 index, meaning Meta stock would have to more than double just to trade in line with the broader tech sector. 

That's exactly what Wall Street investment bank UBS Group expects. It has assigned a $440 price target to Meta Platforms stock, representing a 132% upside from the current price.

2. Snap: Forecasted upside of 210%

Snap (NYSE: SNAP) is another major player in the social media space that's turning its attention to the metaverse, albeit with a unique twist. Snap is the parent company of the Snapchat platform, which is heavily focused on camera technology to enhance its users' experience. 

Unlike Meta Platforms, which is building virtual reality (VR) technologies as a base for the metaverse, Snap is developing augmented reality (AR) technologies. Where VR immerses the user entirely in the digital realm, AR weaves digital technology into the physical world to amplify everyday activities. 

A VR headset restricts the user to a single physical space, whereas Snap's Spectacles glasses are designed to be worn everywhere, projecting digital experiences into the user's vision. Snap believes this will foster human connection, rather than further isolating users, which has been a core complaint about social media platforms as they've soared in popularity. But it's also great for the business case, because wearable technology that can be used anywhere is far more practical, and could help drive adoption.

In the here-and-now, Snap had one of its best years ever in 2021. It finally showed signs of beating its key rival in the social media space, Meta Platforms, as it appears to have successfully found a solution for the privacy changes at Apple that Meta is struggling with.

Snap generated a record $4.1 billion in revenue for the year, marking a tenfold increase since 2016, leading analysts to predict that 2022 could be the first year it delivers a profit.

Credit Suisse is one of the most bullish banks on Wall Street when it comes to Snap stock, betting its stock price could soar by 210% to $93 per share. And over the long run, if Snap's approach to the next generation of social networking proves best, that might be a conservative target.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 2 metaverse stocks that could double, says Wall Street appeared first on The Motley Fool Australia.

What happened

Following Meta Platforms' (NASDAQ: FB) flop of an earnings report last night, shares of rival social media stock Snap (NYSE: SNAP) suffered a sympathetic crash. As of 11:20 a.m. ET Thursday morning, Meta stock was down 24.5%, and Snap was down 20.5%.

So what

Meta Platforms missed on earnings, only barely beat on sales estimates for the fourth quarter of 2021, and predicted as much as a 10% sales miss for the first quarter of 2022. And that poor performance appears to have upset investors in Snap as well.  

One investor in particular, investment bank KeyBank, announced this morning that it is cutting its price target on Snap stock by more than half, and it pointed to Meta Platforms' earnings report as part of the reason. As TheFly.com reports, KeyBank cut its Snap price target to $36 per share, and despite maintaining an overweight rating on the stock, it sees "ongoing ad measurement headwinds" driving shifts out of social media, and warns that Snap will also suffer "margin pressure from investment."

Now what

What KeyBank really seems to be saying here is that it worries investors won't pay as high a multiple for Snap's sales -- not that it doesn't like the stock. Indeed, it bears repeating that KeyBank still considers Snap stock a buy, and that even the banker's lowered price target still implies 40% upside.

Is that likely to happen? Perhaps. While Snap remains deeply unprofitable based on generally accepted accounting principles (GAAP), the company is finally approaching break-even free cash flow (FCF), burning only $7 million in cash over the last 12 months -- versus more than $700 million burned in 2018, for example.

Analysts forecast Snap to report that full-year FCF finally turned positive in 2021, and will grow rapidly toward $3.1 billion in real cash profits by 2025 -- meaning that Snap stock currently costs only about 13 times its cash profits three years from now.

If that's how things actually turn out, I suspect that come 2025, investors will look back at KeyBank's "buy" call on Snap stock today and realize it was right. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Snap stock just collapsed appeared first on The Motley Fool Australia.

Pinterest (NYSE: PINS) and Snap (NYSE: SNAP) both suffered steep declines over the past month.

Pinterest's stock, which had been under pressure since its disappointing second-quarter report in late July, jumped to the low $60s in late October amid rumors of an acquisition by PayPal (NASDAQ: PYPL). However, the stock subsequently tumbled to the mid $40s after PayPal shot down those rumors.

Snap's stock, which had steadily risen after the company offered bullish long-term guidance at its investors day in February, plunged to a five-month low in late October after it posted a disappointing third-quarter report.Over the past three months, shares of Pinterest and Snap have declined about 40% and 30%, respectively, as the S&P 500 has risen 4%. That volatility burned many investors who recently bought both stocks, but will both companies recover and generate much bigger gains over the long term?

Let's take a closer look at Pinterest and Snap's plans for the future and see which social media company might be more valuable by 2025.

How much are Pinterest and Snap worth today?

Pinterest is worth about $29.4 billion, or eleven times this year's sales, as of this writing. Snap is worth $87.6 billion, or 22 times this year's sales.

Here's how rapidly both companies have been growing over the past two years, and what analysts are expecting for the next two years:

Source: Earnings reports. Yahoo Finance. YOY = Year-over-year.

Based on those growth rates, it seems odd that Snap's price-to-sales ratio is twice as high as Pinterest's. However, investors are still willing to pay a premium for Snap because it isn't losing active users on a sequential basis -- as Pinterest did in the second quarter.

Can Pinterest and Snap keep growing?

Pinterest's number of monthly active users (MAUs) rose from 265 million at the end of 2018 to 454 million in the second quarter of 2021. But that marked a sequential decline from 478 million MAUs in the first quarter.

The bulls believe that slowdown, which Pinterest attributed to reopening trends, will be temporary. But the bears believe its growth peaked during the pandemic, and that its MAU growth will stall out as those tailwinds fade.

That uncertainty, along with Pinterest's reluctance to provide multi-year growth targets, has made it difficult to assess the company's future.

Statista Research estimates Pinterest's MAUs in the U.S. will steadily climb from 91 million in the second quarter of 2021 to nearly 109 million by 2025. eMarketer expects 18.5% of Pinterest's MAUs to buy products from its shoppable pins by 2025, up from 16.2% in 2021.

Pinterest's international business has been gaining MAUs at a much faster rate than its domestic business. If Pinterest grows its overseas MAUs at twice the rate of its domestic MAUs over the next four years, it could increase its international MAUs from 363 million in the second quarter of 2021 to 510 million in 2025 -- and give the platform nearly 620 million MAUs.

Snap, which ended the third quarter with 306 million daily active users (DAUs), expects to grow its annual revenue by about 50% over the next few years. It expects the expansion of its self-service ads, a rising mix of higher-value video ads, new augmented reality games and filters, and the expansion of a "social shopping" platform to drive that growth.

However, Snap also seemingly underestimated the impact of Apple's (NASDAQ: AAPL) iOS update, which allowed users to opt out of data tracking features and targeted ads. That change caused it to miss analysts' revenue estimates last quarter, and could throttle its near-term growth.

Which company will be worth more by 2025?

Pinterest and Snap will both face significant challenges over the next four years. But if Pinterest stabilizes its MAU growth and continues to expand its social shopping ecosystem, its revenue should continue to rise.

If Snap stays ahead of Meta's Instagram and ByteDance's TikTok in the teen market, expands its AR and social shopping platforms, and adapts to Apple's platform changes, it could also keep growing.

Therefore, both companies should continue to grow at comparable rates through 2025. If Pinterest hits analysts' targets for 2021 and 2022, then continues to generate an average of 25% revenue growth for the following three years, it could generate $6.7 billion in revenue in 2025. If Snap follows that same path, it could generate $11.2 billion in revenue in 2025.

So even if Pinterest and Snap were trading at the same price-to-sales ratios in 2025, Snap would likely still have a much higher market cap.

Look beyond the market caps

Pinterest probably won't be worth more than Snap by 2025, but that doesn't make it an inferior investment. Both of these social media companies have clear strengths and weaknesses, and investors should focus on those issues instead of fretting over which company has the higher market cap. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Will Pinterest be worth more than Snap by 2025? appeared first on The Motley Fool Australia.

Back in 2013, Facebook (NASDAQ: FB) reportedly tried to buy Snap (NYSE: SNAP) for $3 billion. Snap CEO Evan Spiegel rejected Facebook's offer, and the company is worth roughly $120 billion today.

Snap is still much smaller than Facebook, which recently became a trillion-dollar company. But if Snap continues to grow, could it eventually match -- or even surpass -- Facebook's market cap by 2030?

Where will Snap be in 10 years?

During Snap's investor event earlier this year, it predicted its revenue would grow about 50% annually over the next few years. The company expects the expansion of its self-service ads, a growing mix of higher-value video ads, new augmented reality (AR) lenses and in-app games, and its evolution into a camera-based "social shopping" platform to drive that growth.

Snap is also testing out "Minis," which are mini programs integrated into its app. This walled-garden strategy, which mirrors Tencent's Mini Programs on WeChat, could eventually enable Snapchat's users to order food, buy products, make payments, and more without ever leaving the app. This isn't a surprising move, since Tencent is one of Snap's biggest investors and WeChat's Mini Programs have been wildly successful in China.

Snap has also been testing an in-app currency, Snap Tokens, to monetize Snapchat's games. In the future, it could enable third-party developers to monetize their Minis with Tokens, or allow Spotlight's creators to monetize their TikTok-like videos with Token-based tips.

The company recently expanded Snap Map, its searchable map for user-submitted videos, with business recommendations -- which could pave the way toward more location-based services and make it a viable alternative to Alphabet's Google Maps. Lastly, Snap's Spectacles, which it continues to sell in limited batches, could give it a foothold in the nascent smart-glasses market.

All these moves suggest Snapchat could become a diversified all-in-one "super app" that will serve a much larger audience than its current user base of 293 million daily active users (DAUs) by 2030.

Where will Facebook be in 10 years?

Facebook hasn't provided any comparable long-term forecasts yet. But it will likely grow at a much slower rate than 50% over the next few years, and analysts expect its revenue to grow just 19% next year.

Facebook ended last quarter with 3.51 billion monthly active people across its entire family of apps -- which include its namesake platform, Messenger, Instagram, and WhatsApp. That's nearly half of the world's population, so Facebook's user growth will likely decelerate as it focuses on boosting its average revenues per user -- especially in its less profitable overseas markets -- to offset that slowdown.

In the near term, Facebook will likely focus on selling higher-value video ads, expanding its Audience Network across third-party websites and apps, and changing its targeted advertising methods to counter Apple's recent privacy changes in iOS and Google's planned ban on third-party cookies in Chrome.

It will also rely more heavily on Instagram, which is growing faster than its core platform and generally more popular with younger users. Like Snap, Facebook will transform Instagram into a social shopping platform with shoppable posts and streamlined check-out options.

Facebook's fledgling VR and AR businesses could take off over the next 10 years. It's already established a first-mover's advantage in the VR market with its Oculus headsets, and its upcoming smartglasses will likely be built on top of those software foundations. These devices could make Facebook's ecosystem even stickier, boost its hardware revenues, and reduce its overall dependence on its core advertising business.

But could Snap be worth more than Facebook by 2030?

Snap and Facebook could both become much larger by 2030, but basic math suggests it's highly unlikely the former will become more valuable than the latter.

If Snap grows its revenues 50% every year, its revenue would rise from $2.5 billion in 2020 to $145 billion in 2030. Assuming the stock still trades at about 30 times sales, Snap could be worth $4.35 trillion by then. But that's a rosy best-case scenario for Snap since it would be very difficult for any company to maintain an average revenue growth rate of 50% with a price-to-sales ratio of 30 for an entire decade.

If Facebook grows its revenues 20% every year, its revenue would rise from $86 billion in 2020 to $532 billion in 2030. If the stock still trades at about nine times sales, the company would be worth $4.79 trillion. That's a conservative outlook, since Facebook could easily generate 20% sales growth every year as it aggressively monetizes Instagram and expands its VR and AR ecosystems.

Snap could be nearly as valuable as Facebook by 2030 if everything goes right and investors continue to pay a premium for its growth, but Facebook merely needs to maintain its current course to stay ahead.

Yet that doesn't necessarily mean Facebook is the better investment, especially if Snap actually generates 50% growth annually over the next few years. Therefore, investors should focus on both companies' strengths and weaknesses instead of fretting over market caps to decide which is the better long-term investment.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Will these US-listed shares be able to deliver the goods? Here's a quick look.

US shares reporting earnings this week

International Business Machines Corp (NYSE: IBM)

International Business Machines Corp (IBM) is set to report its second quarter earnings after market close on Monday (American time).

The company is a global technology company that provides hardware, software, cloud-based services, and quantum computing. IBM has been on an acquisition spree, buying companies like BoxBoat Technologies and Red Hat Inc to expand its business.

Analysts are forecasting the company to report revenue of $18.3 billion. This would represent an increase of 3% on the prior corresponding period. Shares in the US company have gained 12.1% year-to-date (YTD) – currently at US$138.90.

Netflix Inc (NASDAQ: NFLX)

Video streaming giant Netflix will report its earnings after the US share market closes on Tuesday.

Investors are especially interested to see if Netflix can continue to grow as it faces competition from streaming services like Disney Plus, Hulu, Amazon Prime Video, HBO Now, and others. With so many options for entertainment at our fingertips these days, investors want to know if Netflix has what it takes to remain a leader in the industry.

Last quarter, the company remained adamant that weakness in user growth was the fault of temporary challenges and not competition. Shares in this US stock are trading 1.4% higher YTD.

Johnson & Johnson (NYSE: JNJ)

Next on the list is American health care and pharmaceutical manufacturer Johnson & Johnson. The 135-year-old company is slated to report its quarterly results before the US share market opens on Wednesday.

Analysts at Wells Fargo are forecasting $22.7 billion in total sales for the quarter. On the other hand, the consensus estimate is at $22.5 billion. It will be interesting to see if the company's COVID-19 vaccine rollout has had any impact – with Johnson & Johnson intending to sell its vaccines at cost.

At the time of writing, shares in the US multinational giant are 7.4% higher YTD – fetching US$168.1.

Snap Inc (NYSE: SNAP)

The parent company of social media app Snapchat is set to release earnings after market close on Thursday. Shareholders will be waiting with bated breath for the company's performance.

The messenger app has continued to enjoy a rise in popularity over the past year. Furthermore, the last quarter saw daily active users increase 22% from the prior year to 280 million. According to Yahoo Finance, the average estimate for revenue for this quarter is US$845 million. This would represent an increase of 92.5% on the prior corresponding period.

Shares in the US messenger company have surged 19.6% YTD. As a result, Snap has outperformed the S&P 500 index by ~2.7%.

Twitter Inc (NYSE: TWTR)

Finally, Twitter is expected to release its quarterly earnings after the US share market close on Thursday. Shareholders will be looking to see how engagement has tracked on the social platform as the world adapts to the 'new normal'.

After revealing plans to nearly double revenue to US$7.5 billion by 2023, this quarter's result could make or break investors' belief in such a target. Additionally, the company has been struggling to effectively monetise its platform, resulting in substantial losses on the bottom line over the last 2 years.

Despite the uncertainty, shares in this US social networking company are up 21.8% YTD. At the time of writing, Twitter shares are going for US$66.41 apiece.

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Recent research by Morgan Stanley found that social media usage on some platforms has dropped sharply relative to levels at the end of 2020 when more consumers were staying at home. A reopening economy, therefore, may have an inverse relationship on some aspects of user engagement for some social media platforms. But one social media company, in particular, may actually benefit from a reopening economy: Snap (NYSE: SNAP) -- the parent company of photo- and video-sharing app Snapchat.

Sure, Morgan Stanley did say in its report that it believed one of Snapchat's in-app products -- Snapchat Discover -- saw a drop in engagement recently compared to levels in December 2020. But Discover, which helps keep users up-to-date on current events and find content from pop culture, influencers, and more, is just one feature of the Snapchat experience. Peer-to-peer engagement and total advertising revenue on the app, however, are likely both thriving.

Improving user engagement

Interestingly, Snap management said in the company's first-quarter earnings call that it saw "inflection points" in story posting, engagement with its Snap Map, and the rate of new friendships as the economy started to reopen in February. "We designed Snapchat to be a useful complement to real-life friendships and are excited about these optimistic trends developing with our audience," said Snap founder and CEO Evan Spiegel in the company's earnings call.

While users may not be engaging as much with content in Snap's Discover tab, increased stories from users will keep advertisers coming back to the platform.

Accelerating revenue growth

Further, though there may be some uncertainty about how a reopening economy will affect engagement across different aspects of the Snapchat experience, investors can expect one thing with near certainty: huge growth in advertising revenue. Snap's first-quarter revenue soared 66% year over year to $770 million, helping the tech company generate positive free cash flow for the first time. And for Q2, management expects even stronger growth. The company guided for revenue to grow 80% to 85% year over year. Snap's incredible top-line momentum represents both broad-based business momentum and a rebound from a period when marketers reduced or even paused ad spend as they dealt with uncertainties related to COVID-19.

A reopening economy is not only leading to an increase in Story postings from Snapchat users, but it is helping the company attract massive investment from advertisers as they try to capitalize on consumers' return to more normalcy. It's fair to say that while there may be some challenges for Snapchat as the economy reopens, it's mostly a greenfield opportunity.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Big tech is getting even bigger.

The FAANG group of stocks crushed earnings across the board this quarter, showing that dominant tech companies are only getting stronger as the economy revs up into the post-COVID era.

All of these giants posted results that were much better than analyst estimates (although Netflix missed expectations on a key subscriber growth metric). The chart below shows how their earnings-per-share (EPS) results compared with expectations.

Source: Yahoo! Finance.

It's remarkable that companies as big as this quintet, which together make up more than $6.73 trillion in market value, were able to beat Wall Street expectations by so much. The chart above represents more than $10 billion in unexpected profits in just a single quarter. That's more than all but a handful of companies make in a year.

The results show that these companies are stronger than ever, but they're actually even more profitable than they look.

Get to know GAAP

All of the FAANG stocks report earnings according to generally accepted accounting principles (GAAP), which is required by the SEC. All companies report GAAP results, but most other publicly traded companies provide an additional adjusted profits figure, which becomes the benchmark for the stock. FAANG stocks don't do this. Their profits are based on GAAP and include expenses like share-based compensation that other companies make disappear by instead emphasizing measurements like adjusted EPS or EBITDA.

To get an idea of how profitable the FAANG group is, compare them to the next wave of tech stocks that have gained fanfare recently.

Tesla (NASDAQ: TSLA), the fast-growing leader in electric vehicles, reported $438 million in GAAP profits, or $0.39 per share in its first quarter, and $1.05 billion in non-GAAP profits, or $0.93 per share. Adjusted EBITDA was even higher at $1.84 billion. There's a significant difference between the three profitability marks Tesla gives. $614 million in share-based compensation accounts for the difference in between GAAP and non-GAAP earnings, which more than doubles Tesla's profits.

Shopify (NYSE: SHOP) is another high-growth stock that has dazzled investors with its surging revenue and returns. In its first quarter, it reported adjusted operating income of $210.8 million, nearly double the GAAP figure as it backed out share-based compensation, related payroll taxes, and amortization of intangibles.  

Other examples abound. Uber (NYSE: UBER) is the leading global ride-sharing company and a threat to disrupt transportation in multiple ways, but the historically loss-making company has only promised to be profitable on an adjusted EBITDA basis by the end of this year. Snapchat parent Snap (NYSE: SNAP) may be one of the most profligate spenders on share-based compensation. In its first quarter, it reported a GAAP loss of $286 million but finished with a $2.5 million non-GAAP profit when not factoring in $237 million in share-based compensation and other expenses. The company has acknowledged that it needs to rein in share-based comp as it is steadily diluting shareholders, with shares outstanding up 3% last year.

What it means for investors

There's nothing wrong with reporting adjusted earnings per share or using share-based compensation, and there are plenty of good reasons to invest in stocks like Shopify and Snap that are growing fast and have disruptive potential. However, their use of adjusted earnings shows that investors aren't making apples-to-apples comparisons when they compare them with FAANG stocks. 

Apple posted GAAP net income of $23.6 billion in its quarter but also had $4 billion in share-based compensation. If it were adjusting its profits, they would be nearly 20% higher. 

The tech giants don't need to do that, though. They are already delivering monster profits, and they may be purposely avoiding padding their figures because of antitrust concerns. They don't want to look even more powerful than they are.

But powerful companies are good for investors, and all four of these businesses dominate their respective subsectors. Unless something changes on the regulatory front, these FAANG stocks will continue to spin off tons of cash, and they all look like great bets to continue beating the market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Coinbase shares are often referred to as 'Class A'. 

Now, this isn't some arbitrary badge of self-congratulation (i.e aren't we a Class A company?). It actually refers to something that is enormously relevant for any current or potential Coinbase investor. 

And it's this: Coinbase has two classes of shares. But only one is available for everyday investors like you or I. Those shares are the Class A shares that investors can now buy on the Nasdaq exchange. Those shares entitle the owner to one vote per share at Coinbase, as one might expect.

However, there is also another class of shares that investors can own of Coinbase – Class B shares. According to Coinbase's SR-1 prospectus filing with the US Securities and Exchange Commission (SEC), an owner of a Class B share is entitled to 20 votes per share, rather than 1.  However, these shares are not available to the public or on the stock market. Only institutional investors and company insiders can own and trade these shares.

What's the deal with Class A and B shares?

If this sounds outrageously unfair to you, I wouldn't be surprised. On the ASX, these types of multi-class shares that don't conform to a 'one vote, one value' system are not permitted. However, they are common in the US. It gives companies a way to retain power with founders or insiders while permitting them to dilute their ownership of the company. Its proponents often argue that it allows the founder to focus on the company's long-term future by not having to worry about other substantial shareholders. 

Other companies that employ a ClassA/B model include Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B), Facebook Inc (NASDAQ: FB) and Fox Corp (NASDAQ: FOX)(NASDAQ: FOXA).

Triple the fun

However, it could be even more complicated. Some companies even have a triple-class share structure. Take Google-owner Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL). It has three classes of shares. Class A shares trade under the GOOGL ticker. Those owners are entitled to one vote per share. Class C shares are the GOOG shares. Class C owners get 'observer status' with zero votes per share. Alphabet's Class B shares get 10 votes per share, but, like Coinbase Class B, are not traded on the public share market, and are mostly owned by Alphabet's founders Larry Page and Sergei Brin. Page and Brin, incidentally, have now left the company but kept their Class B shares.

Perhaps the most undemocratic model on the US markets goes to Snapchat owner Snap Inc (NYSE: SNAP) though. According to Snap's filing prospectus from 2017, there are three classes of SNAP shares. But only Class A are publicly available. Class A shares, however, come with zero votes. Class B shares are available to insider investors. But these shares still only come with one vote apiece. Class C shares come with 10 votes per share. But only Snap's co-founders in Evan Spiegel and Bobby Murphy own these shares. According to Snap's prospectus, this gave them 88.5% of the company's voting power at listing. 

America may be a democracy, but its share markets are a different story in many cases.

The post Coinbase debut: What is a Class A share? appeared first on The Motley Fool Australia.

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 1 of our interview, Spaceship portfolio manager Jason Sedawie tells how he aims to double his clients' money every 5 years.

Investment style

The Motley Fool: What's your fund's philosophy?

JS: The fund we run here [within] the flagship Voyager fund is Spaceship Universe. So that was launched nearly 3 years ago and so we have this approach we call Where The World Is Going, WWG. 

In that approach, we try to anticipate trends and think about what products and services are getting more relevant in the future. We're also focused on the moat, barriers to entry for potential competition — so that's the philosophy in how we think about investing.

MF: What's the typical investment horizon?

JS: So we tell our investors 7 years and when we're investing ourselves, I guess we're looking at a 5-year time horizon for the shares. We try to look over a 5-year period for the shares to double over that time. That works out to be 15% per annum, so that's what we're looking for.

MF: How has the fund performed in the past year?

JS: It ended up being a good year for the portfolio because the way we think about things is we talk about trying to anticipate trends and what products will be more relevant in the future. 

So we're very focused on companies that are solving problems. A lot of these problems really came to light or they were just brought forward since people really needed to have an e-commerce solution or go online. A lot of our companies did really well. For the Universe fund, it was 54.96% for [the year to] February.

MF: What's the proportion between Australian and foreign shares?

JS: It's around 80% global and 20% Australian.

MF: Is the global portion dominated by the US?

JS: Yeah, a bit over half US.

MF: To give our readers an idea, what are your two biggest holdings?

JS: Good question. We run it equally weighted, so for me to say what are the two biggest holdings, it can fluctuate quite a lot. 

But the largest holding at the moment, just given the market movements, is Rakuten Inc (TYO: 4755), which is an e-commerce player in Japan. So that's risen lately because Japan Post Holdings Co Ltd (TYO: 6178) just bought into the company and Tencent Holdings Ltd (HKG: 0700) have bought into the company. 

They're obviously very large companies. You've got Japan Post on your side for delivery integration. Obviously Tencent's background as a super app is really interesting. 

That will be our biggest at the moment, but it does change because we run it as an equally weighted portfolio.

MF: It sounds like Spaceship isn't afraid of Japanese equities, which many investors have shied away from for many decades.

JS: It's such a boom over there, [but] it's still down what, 20-25% from 30 years ago. So they've seen a lot of equity destruction over there. We only have two companies in Japan, Rakuten and SoftBank Group Corp (TYO: 9984). 

It's a very modern economy but it's quite strange in some ways — the level of cash adoption is still quite high. There's still a lot of stamp usage and faxes, and so it's interesting for such a modern economy just to see some of the trends over there. But they're changing as well over time.

Buying and selling 

MF: What do you look at closely when considering buying a stock?

JS: Probably like everyone else, we look for a couple of things. We have that Where The World Is Going approach — so to implement them we look at new habits being built, new solutions for problems or better ways to start doing things. 

Secondly, a moat. Are they building a moat? Just some scalable plan that will have a network effect there? 

Thirdly, management — do they understand if they are building a moat [and] how that fits with these trends. 

And finally the fourth one is the expected return rate on the company doubling every 5 years.

MF: What triggers you to sell a share?

JS: Deterioration of moat, I'd say, is the first one. So some sort of event where they lose market share or some scale is at risk. 

The second one [is] just a better competing product, some sort of disruption that might make the reason we own the stock change. 

And then finally, a pretty common one is just we find a better opportunity… we just think there's something better out there with the capital.

MF: Have you ever had to sell a share because it fell out of that Where The World Is Going criteria?

JS: Yeah, it can happen quite a bit. With Netflix Inc (NASDAQ: NFLX) we just worried about the moat and the competition, and so we sold it just before COVID. And then obviously they benefited from COVID, but we just got concerned with the pricing power they had with [rivals like] Disney Plus and all the other services. 

So yeah, it's not bulletproof but it's a process that works over time. You know, you just got to stick to that process if you think that moat is deteriorating a little bit — really reconsider the reason for owning it.

What's coming up?

MF: Where do you think the world is heading at the moment?

JS: COVID has really accelerated changes in habits. 

Thankfully all these vaccines were put together in record time for COVID and I think that's really interesting what's happening in healthcare. 

If I step back as a fund manager I look at some of the largest companies in the world — companies like Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG), Facebook Inc (NASDAQ: FB), Snap Inc (NYSE: SNAP), Twitter Inc (NYSE: TWTR) and TikTok — they've all grown up on a small percentage of GDP: advertising. 

Advertising is only a bit over 1% of the US GDP. And half of that is online, so let's say 0.5% of GDP has created massive companies that we all know about. So I'm really interested just to see the change in healthcare. Healthcare has historically been an inefficient industry, around 17% to 18% of the US GDP.

You see things like mRNA vaccines and all this tele-health, I think it's a very interesting time in healthcare. And we're just seeing these changes sort of happen across a lot of other industries as well. 

So for me personally it's a very interesting time as a stock picker, because a lot of these problems are getting solved in a better way. If we can find the companies that provide the solutions, that could be a really good opportunity for us and our investors. 

Tomorrow: part 2 of our interview, where Sedawie reveals his most underrated and overrated stocks.

The post I want to double your money every 5 years: fundie appeared first on The Motley Fool Australia.

Between the four major U.S. social media stocks -- Facebook (NASDAQ: FB), Twitter (NYSE: TWTR), Pinterest (NYSE: PINS), and Snapchat (NYSE: SNAP) -- which was the worst performer of 2020? 

If you guessed Facebook, you're right. Pinterest's 250% price rally in 2020 far outpaced Facebook's 31% gain. Facebook's returns also lagged the Global X Social Media Index ETF (NASDAQ: SOCL), which tracks over 30 companies involved in social media. In 2020, the ETF posted an annualized return of 78.4%. 

That said, it's too early to call Facebook an underperformer. This, after all, is a company that's consistently delivered double-digit percentage growth year after year. The big question is: Can this FANG stock get its bite back? I think so, and here are two reasons why.

1. Facebook executed incredibly well despite COVID-19

Ask corporate America what they thought about 2020 -- and many will tell you it was the worst year of the decade. The coronavirus devastated many companies in industries ranging from retail and energy to tourism.

Facebook had a pretty good year, though.

In 2020, Facebook's revenue rose 22% to $86 billion, driving a 58% surge in net profit to $29 billion. Monthly active users (MAU) also grew 12% year over year, to 2.8 billion.

Initially, there was concern that advertisers would cut back on spending, hurting Facebook's revenue. But those fears turned out to be unfounded. Forced to stay at home due to COVID-19, people spent more time on social media. To reach these users, businesses had little choice but to keep advertising on Facebook -- by far the largest social media network. In 2020, nearly a third of every digital advertising dollar went to Facebook, according to a report by the World Advertising Research Center (WARC).

These numbers validate the strength of Facebook's business model, which is anchored to the value it provides users. For one, the Facebook family of services -- including Facebook, Messenger, Instagram, and WhatsApp -- keeps people connected. But Facebook provides much more than "just" communication tools. Its apps are also an avenue for news, entertainment, and business. All these features have made Facebook simply indispensable -- and more so amid the pandemic.

Facebook made a few smart moves in 2020. One of them was a renewed push into e-commerce, in partnership with Shopify (NYSE: SHOP). With the launch of Facebook Shops and other e-commerce tools, both companies will make it easier for Facebook's users to grow their online businesses. 

This gives users yet another reason to spend time on Facebook. And if successful, Facebook's e-commerce initiatives could improve its user monetization.

2. Investors aren't very excited about Facebook

As the pandemic ravaged global economies, many small businesses were forced to shut down. Millions of Main Street Americans have lost their jobs.

Still, Wall Street had one of its best years ever. The Nasdaq Composite (NASDAQINDEX: ^IXIC) rose 44% in 2020 -- its best performance in 11 years, according to MarketWatch.

Shares of Shopify and MercadoLibre almost tripled in 2020 as they rode on the tailwinds caused by the pandemic. But Facebook -- which benefited from the pandemic and delivered solid revenue and profit growth -- rose a relatively measly 31%. 

I think investors haven't neglected Facebook's strong execution in 2020. Instead, they've been rattled by repeated calls to break up Facebook, as well as its very public clash with Apple. That has taken some glitter off Facebook, resulting in it trading at a valuation of less than nine times 2020 revenue.

While that appears reasonable, consider the astronomical valuations enjoyed by trendier tech companies like Snowflake (NYSE: SNOW). Snowflake trades at a whopping 277 times 2020 sales.

Why Facebook is a buy now

Facebook shines when it comes to consistency and growth. Between 2016 and 2020, revenue rose at an impressive compound annual growth rate of 33%. 

In coming years, Facebook will likely keep growing at double-digit rates as it unlocks the value of Instagram and WhatsApp. Facebook could also deliver upside surprises with newer ventures, including the Oculus virtual reality platform and payment services.

In the near term, there's a risk of a pullback -- given Facebook shares have almost doubled from their March 2020 lows. But that shouldn't deter investors with a five-year time horizon. Facebook is here to stay, and it will only get bigger in years to come.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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