The Long-Term Prospects for Social Media Stocks

Around a month ago, as the big online-advertising focused tech and social media companies released earnings, I wrote a piece saying that, based on the reactions to earnings from Twitter (TWTR) and Snap (SNAP), buying both Meta (META) and Alphabet (GOOG, GOOGL) on post-earnings weakness looked like a good strategy. Both stocks obliged, dropping on release day, only to bounce back immediately and put on around twenty percent over the ensuing two weeks or so. Still, that was clearly a short-term strategy, so now the question becomes: Are social media-related stocks good long-term buys at current levels?

Yes and no.

In general, any pullback in digital advertising spend that we are seeing will be a temporary phenomenon; with P/Es in the industry generally at multi-year lows, there is some obvious long-term value. The pullback will be temporary for one simple reason: online advertising reaches more people than traditional media, and its advantage will continue to grow.

A March study by Hub Entertainment research showed that time spent watching TV accounts for only 38% of screen time for U.S. consumers between the ages of thirteen and seventy-four. As you might expect, even that low number is skewed higher by the inclusion older viewers. The future consumers and the more attractive demographic to advertisers, the 13-24 years old bracket, only devote 13% of their screen time to watching TV. Anecdotal and observational evidence would also support the numbers. Anyone who is themselves in that age bracket or who has children, knows that younger people spend far more time watching YouTube videos, Instagram Reels and the like than they do TV with conventional ads.

Online advertising, and particularly on social media, isn’t going anywhere. While the Fed’s rate hikes may slow the economy and temporarily damp down ad spending overall, online ad spend will bounce back at some point. The P/Es of stocks in the space, however, are reflecting current conditions and expectations for the next few months, not the long-term trend. Forward P/Es of stocks in the industry have tumbled. Over the last year, they have roughly halved for META (29 to 14), GOOG (31 to 18), and TWTR (80 to 45), while SNAP’s forward P/E has dropped from 476 to 33.

In the case of both SNAP and TWTR, there are reasons beyond just the decline in social media advertising revenue for that P/E drop. The emergence of TikTok and increased video content on other platforms, particularly Instagram, have eaten into Snapchat’s market, and the Elon Musk takeover saga has both distracted Twitter and revealed some potentially worrying problems with the number of bots on the platform, and therefore their engagement numbers. Those things cast doubt on the ability of either company to fully benefit from a bounce back in advertising spending, so until the company-specific pictures are clearer, neither of those are the way to play this.

META and GOOG aren’t perfect pure plays either given the diversification of both companies over the years and the strength of TikTok in the space. However, at fourteen- and eighteen-times forward earnings, earnings that themselves are being underestimated based on current conditions, they still look like good long-term investments.

It wasn’t that long ago that “value” in the social media and online advertising spaces was defined as a stock with less that a triple digit P/E. Obviously, with the benefit of hindsight, that was excessive, but now the pendulum looks to have swung too far in the opposite direction, at least when it comes to the OG giants in the industry. As a result of that and with two competitors having problems, META and GOOG look like value based on pricing and prospects and are good long-term buys.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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