Why MKM Is Neutral On These 3 Social Media Stocks

Social media users have plenty to type about these days, but not every platform is buzzing. MKM Partners is on the fence about the near-term prospects of three socials in particular.

The Ratings

MKM Executive Director Rohit Kulkarni initiated coverage on the following stocks:

• Snap Inc SNAP with a Neutral rating and $16 price target;
• Twitter Inc TWTR with a Neutral rating and $144 target; and
• Pinterest Inc PINS with a Neutral rating and $29 target.

The Snap Thesis

Snap demonstrated strong execution over the last year, and it’s poised to profit near-term from the Android app, the launch of a gaming platform, a sales reorganization and premium content partnerships. But Kulkarni thinks investor expectations are still too high.

“However, we do not believe that SNAP has a long-term sustainable competitive moat, given the history of user growth and engagement lumpiness,” he wrote in a note. “Near-term, we believe competitive headwinds from TikTok and Instagram (Threads launch) are rising, as observed from Q3 mobile app downloads data.”

Kulkarni also sees downside risk in high video-related cloud computing costs and revenue sharing agreements with premium-video content producers.

See Also: What 'Grand Theft Auto V' Can Teach Us About The Next Big Social Network

The Twitter Thesis

By Kulkarni’s estimates, Twitter stands to gain significant revenue from the 2020 presidential election and Summer Olympics.

“We believe Twitter's turnaround is still in its early innings as the company's active user base has stabilized and started to grow again,” he wrote, noting fundamentals have improved with increasing usage and a strong platform.

Twitter has also worked to restore public trust by reducing fake, malicious and robotic accounts, and it’s done so in a relatively cost-efficient manner.

"Twitter's operating expenses haven't been accelerating while the company's self-reported health metrics are trending in the right direction," Kulkarni wrote.

The company boasts a competitive moat and a big, expanding user base, and the analyst said it deserves a premium multiple. However, he remains sidelined considering tough comps and high Street expectations.

The Pinterest Thesis

Pinterest trades 43% above its IPO price, and at this juncture, Kulkarni doesn’t expect vast multiple expansion. U.S. user growth has been slowing, Instagram has raised the level of competition, and daily and monthly active usage has underperformed peer metrics. The analyst sees no catalysts for surprise upside through the first half of 2020.

But Pinterest’s limits are largely offset by positive ad prospects. With more than 80% of U.S. moms on the platform, Pinterest provides a unique opportunity for advertisers to hit a valuable demographic with overt purchasing signals and strong purchasing power.

“Pinterest remains in the very early stages as far as monetization and international expansion is concerned,” Kulkarni wrote, noting that its average revenue per user is a mere fraction of Facebook, Inc. FB’s or Twitter.

He forecasts consistent positive EBITDA beginning the third quarter of next year, as well as long-term upside from the expansion of Pinterest’s marketing partners program.