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Best Buy: Facebook, Twitter, or Snap

The social-media space is dominated by three companies: Facebook (NASDAQ: FB), Twitter (NYSE: TWTR), and Snap (NYSE: SNAP). All three are poised to take advantage of one of the fastest-growing digital advertising markets as a larger percentage of ad budgets shift from television to digital.

Currently, only Facebook is trading above its IPO price -- way above. Twitter and Snap have floundered as user and revenue growth have failed to live up to the expectations set at their respective initial public offerings.

But with Facebook stock flying high and Twitter and Snap trading near their historic lows, investors may be wondering which offers the best option to capitalize on the rise of social media advertising.

Let's look at each company to determine which offers the best buy among the three.

Image source: Facebook

The social network

Facebook is an absolute giant in social media. Its flagship platform, Facebook, has over 2 billion monthly active users. It has two messaging apps, WhatsApp and Messenger, with over 1 billion users. Instagram, the photo-sharing network, is well on its way to 1 billion as well. And the company just acquired tbh, one of the fastest growing social apps among teens. Facebook's portfolio of apps and their prodigious user bases is certainly impressive.

Even more impressive is the growth in active advertisers on Facebook's platform. During its third-quarter earnings call, the company just announced surpassing 6 million advertisers. Facebook has also managed to push 2 million advertisers onto the relatively nascent Instagram ad platform.

As a result, Facebook is managing to grow ad revenue at a staggering rate, especially considering CFO Dave Wehner has been warning of an ad revenue growth slowdown in the second half of 2017 for over a year now. That slowdown has yet to hit Facebook, and if ad prices on the platform keep climbing, it could be a much more gradual slowdown than initially anticipated.

Facebook benefits from the network effect, which brings both new users and new advertisers to the platform. With superior ad targeting and a huge audience, Facebook is able to capture a growing share of the digital advertising market.

Image source: Twitter, Copyright Aaron Durand (

) for Twitter, Inc.

The little blue bird

2017 has been a tough year for Twitter. It pulled back on its R&D and marketing spending while reducing the number of ad products it offers to focus on profitability. In the meantime, its monthly active user growth is only marginally better than last year, up 4% year over year as of the end of the third quarter. Management likes to point out that daily user growth is much better, up 14% year over year in the third quarter, accelerating from the second quarter.

Still, Twitter is struggling to convert its daily user growth into revenue growth, and management wouldn't provide any indication of when that might happen. After cutting costs in 2017 with expectations of reaching profitability in the fourth quarter, it's not clear how well Twitter will be able to grow that profit.

Average ad prices continue to decline, even on a like-for-like basis, as advertisers become disenchanted with Twitter's ad products. Twenty-one percent of advertisers plan to reduce the amount they spend on Twitter advertising, according to a survey from RBC Capital.

Twitter has a relatively broad user base, but it's been overshadowed by Facebook. Meanwhile, Snap presents a new and interesting platform for advertisers to use their experimental ad budgets following the launch of their self-serve platform.

Image source: Snap.

The ghost in the machine

Investors met Snap's IPO earlier this year with a ton of fanfare. They initially pushed the share price up near $30, but the sentiment quickly cooled following Snap's first quarterly report. The company's earnings have come in below expectations in all three of its quarterly reports as a publicly traded company.

Snap has two big problems: Facebook's Instagram continues to attract users with its copycat tactics, and its new self-serve platform is putting pressure on pricing.

The latter issue is somewhat within the company's control. It's spending heavily on sales and marketing to attract new advertisers to its platform to scale its self-serve business. As more buyers enter the auction for ad inventory, ad prices ought to rise. There's still a question mark surrounding how much return on investment marketers can get from Snap Ads compared with platforms such as Facebook, Instagram, YouTube, and Google, though.

Facebook, however, presents a huge problem for Snap, which has caused user growth to slow considerably. Both Instagram Stories and WhatsApp Status, the same feature but in WhatsApp, have gained 300 million users since launching well after Snap introduced the original format in Snapchat.

Meanwhile, Snapchat has just 178 million users, and growth slowed to 16% year over year in the third quarter. For comparison, Facebook had similar growth on a much larger user base, and Instagram is growing significantly faster.

Snap also has huge cloud hosting commitments over the next five years that will cut into its profitability. That's especially true if user growth continues to slow and revenue growth doesn't live up to the company's expectations.

What's the best buy?

There's not much reason to expect the current trends in social-media advertising to change very much over the next few years. Budgets ought to continue to shift to digital advertising as more consumers ditch cable, but Facebook stands to win the lion's share of those ad dollars.

Facebook's price-to-sales ratio of 15.7 is about 2.5 times that of Twitter's, but it's growing sales much faster. Analysts currently expect Facebook to grow its top line over 30% next year, while they expect Twitter to grow just 6% after declining sales this year. Snap's P/S ratio of 23.8 is higher still, but its revenue growth outlook seems much more uncertain, especially considering it hasn't once hit analysts expectations.

Those willing to take the risk could do well with Snap, but there are still a lot of question marks surrounding the stock. Most people would probably be better off buying Facebook at a fair price and capitalizing on its utter dominance of a growing market.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.