Snap has been public for only a month and the stock has been all over the place. In that time, the shares are down nearly 10% while Facebook's are up 4%. Obviously, a month is too short a timeframe to make any sort of judgment, but it can demonstrate the power of solid earnings growth and long-term potential.
Just last month, Facebook reported a stellar quarter that exceeded estimates across the board. Fourth-quarter earnings of $1.41 per share were $0.10 better than expected. Revenue rose 53%, year to year, to $8.8 billion and vs. the $8.4 billion consensus estimate.
Action Alerts PLUS holding Facebook said daily active users (DAUs) were 1.86 billion for December, an increase of 23%. In comparison, Snapchat DAUs were 158 million at the end of the fourth quarter. Snapchat's active user growth rate actually flattened out after the second quarter last year when DAU growth peaked at 66%. By the fourth quarter, DAU growth was 48%.
While it's early in Snap's growth trajectory, many analysts believe its addressable market is 80% smaller than Facebook's. That's a big difference. Indeed, for Snap to reach Wall Street's 2019 revenue estimate, it would have to grow ad revenue 8-fold--a pretty tall order.
In an attempt to slow Snapchat's growth, Facebook launched Instagram Stories last summer. In just the first five months, Instagram Stories had 150 million DAUs. Instagram ended 2016 with 400 million DAUs, so Facebook caught up pretty fast.
In 2016, Snap generated $404 million in revenue, while Facebook reported $27.6 billion.
Analysts estimate Facebook can grow revenue 37% in 2017 and 27% in fiscal 2017 and 2018. With gross margins between 86% and 87%, Facebook prints money faster than the Fed. The company ended 2016 with $30 billion in cash.
If Facebook can trade up to 24 times 2017 consensus EPS estimates of $6.67, the stock should be worth about $165. Facebook has traded anywhere between 22x and 69x forward estimates since going public, so if the company produces revenue growth of 25-27% and earnings growth of 22%-25% over the next two years, it's reasonable to assume the stock should trade around 24x estimates.
Snap is more of a trade. Analysts think Snap can generate $1.03 billion in revenue this year and double it next year. If the analysts are right, I don't see any reason why the stock can't get into the mid-$20s. However, to reduce my risk, I would buy SNAP in the high teens.
The long-term winner is Facebook, but that doesn't mean you can't make some short-term money trading Snap. Which one is better, depends on your investment timeframe.
At the time of publication, Laudani had no positions in any securities mentioned.
Action Alerts PLUS, which Cramer manages as a charitable trust, is long FB.