Better Buy: Zoom Video Communications vs. Snap

The stock for Zoom Video Communications (NASDAQ:ZM) and Snap (NYSE:SNAP) both generated big gains for investors over the past 12 months. Zoom’s stock price soared 350% as its brand became synonymous with video calls throughout the pandemic. Snap’s stock price rallied over 200% as Snapchat continued to generate impressive growth in users and revenue.

But past performance never guarantees future gains, and both companies face different tailwinds and headwinds this year. Let’s take a fresh look at both companies and see which stock is a better buy.

Zoom faces tough year-over-year comparisons

Zoom’s basic tier is free, but paid users get longer time limits, support for bigger meetings, cloud-based recording tools, and other perks. This freemium model was already generating robust growth prior to the pandemic: Its revenue grew 88% to $622.7 million in fiscal 2020, which ended last January, as its adjusted net income jumped 514% to $101.3 million.

But as the pandemic spread, businesses, schools, and individual users all flocked to its platform. As a result, Zoom’s revenue soared 307% year over year to $1.77 billion in the first nine months of fiscal 2021, and its adjusted net income jumped nearly 11-fold to $630.3 million.

Zoom expects its revenue to rise 314% for the full year, and for its adjusted earnings to increase 726%-731%. But in fiscal 2022, analysts expect its revenue to rise just 38% — assuming the pandemic finally passes — with 3% earnings growth. Its gross margin, which was squeezed throughout fiscal 2021 by an influx of free individual users, will likely dip again as paying businesses and schools reduce their usage of Zoom’s services.

That shift — along with competition from Cisco‘s Webex, Microsoft Teams, Alphabet‘s Google Meet, and other rivals — indicates this year could be tough for Zoom as it faces brutal year-over-year comparisons.

Snap could also hit a few speed bumps

Snap, like most other social networking companies, generates most of its revenue from online ads. The pandemic throttled its ad sales in the second quarter of 2020, but its business recovered in the second half of the year.

As a result, Snap’s revenue still rose 46% year over year to $2.51 billion in fiscal 2020, which aligns with the calendar year. Its adjusted net loss narrowed from $226 million to $91 million, and its adjusted EBITDA turned positive for the full year.

Snapchat’s daily active users (DAUs) grew 22% year over year to 265 million in the fourth quarter, and its average revenue per user (ARPU) increased 33%, marking its strongest ARPU growth in five quarters. It attributed that acceleration to rising prices for its ads (which increased year over year for two straight quarters) and the expansion of its augmented reality (AR) and video ecosystems.

Analysts expect Snap’s revenue to rise 44% in 2021 with a narrower net loss. However, three comments during Snap’s latest conference call spooked the bulls. First, it noted that “many brand advertisers” paused their ad spending in the first two weeks of January after the Capitol riot.

Second, it warned that Apple‘s forthcoming privacy changes to iOS 14 could impact its ad revenue. Lastly, it expects its adjusted EBITDA to turn negative again in the first quarter as it pays out more incentives on Spotlight, its TikTok-like platform for user-created videos.

Which stock is cheaper relative to its growth?

Zoom trades at just over 30 times next year’s sales and about 130 times forward earnings. Those valuations seem frothy, but they could be justified if the pandemic drags on or its paying customers consistently use Zoom after the crisis ends. Either outcome could help Zoom beat Wall Street’s conservative expectations for fiscal 2022.

Snap trades at about 20 times next year’s sales. That valuation also seems high, but it’s actually cheaper than the price-to-sales ratios of several other tech companies that are generating slower sales growth. It also faces some near-term headwinds, but its core business remains strong and well-insulated from the social, ethical, and regulatory concerns that are plaguing Facebook and Twitter.

Zoom and Snap are both solid growth stocks, but I’d rather buy the latter, for four simple reasons: Snap has a loyal base of Gen Z and millennial users, it will likely generate more stable growth after the pandemic passes, it faces less direct competition, and it’s slightly cheaper relative to its sales growth. As for Zoom, I’d like to see its growth stabilize after the pandemic ends before I consider it a worthy buy.