Both tech stocks generated huge gains in 2020, but which is the better investment for 2021?

Shares of Zoom Video Communications (NASDAQ:ZM) and Snapchat (NYSE:SNAP) have both generated big gains for investors over the past 12 months. Zoom’s stock price rose 350% as its brand became synonymous with video calling during the pandemic. Snap’s stock price rose more than 200% as Snapchat continued to generate impressive growth in users and revenue.

But past performance is no guarantee of 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 comparison

The basic version of Zoom is free, but paying users get longer time limits, support for larger meetings, cloud-based recording tools and other perks. That model was generating robust growth even before the pandemic, with revenue growing 88% to $622.7 million in fiscal 2020, which ended last January, while adjusted net income rose 514% to $101.3 million.

Zoom expects full-year sales growth of 314% and adjusted earnings growth of 726% to 731%. For fiscal 2022, however, analysts expect only a 38% increase in sales – assuming the pandemic ends – and a 3% increase in profits. Gross margins, squeezed in fiscal 2021 by an influx of free individual users, are likely to fall again as paying businesses and schools reduce their use of Zoom services.

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

Snapchat could also face a few obstacles

Snapchat, like most other social networking companies, generates the majority of its revenue from online ads. The pandemic curbed its ad revenue in the second quarter of 2020, but its business rebounded in the second half of the year.
As a result, Snapchat’s revenue increased in fiscal 2020, still up 46% year-over-year to $2.51 billion. Adjusted net loss narrowed from $226 million to $91 million, and adjusted EBITDA turned positive for the full year.

Analysts expect Snapchat’s revenue to grow 44% in 2021, with a smaller net loss. However, three comments during Snapchat’s recent conference call spooked some investors. First, it noted that “many brand advertisers” paused their ad spending in the first two weeks of January following the Capitol uprising.
Second, it warned that Apple’s upcoming privacy changes in iOS 14 could hurt its ad revenue. Finally, the company expects its adjusted EBITDA to turn negative again in the first quarter as it pays out more incentives for Spotlight, its TikTok-like platform for user-created videos.

Which stock is more favorable in relation to its growth?

Zoom is trading at just over 30 times next year’s sales and 130 times future earnings. These valuations seem stretched, but could be justified if the pandemic continues or if paying customers continue to use Zoom after the crisis is over. Both could help Zoom exceed Wall Street’s conservative expectations for fiscal 2022.

Snapchat is trading at about 20 times next year’s revenue. This valuation also seems high, but it is actually more favorable than the price-to-sales ratio of several other tech companies that are experiencing slower revenue growth. However, the company’s core business remains strong and is well insulated from the social, ethical and regulatory concerns that plague Facebook and Twitter.

The winner: Snapchat

Snapchat has a loyal base of Gen Z and Millennial users, it’s likely to generate more stable growth after the pandemic is over, it faces less direct competition, and it’s slightly cheaper relative to its revenue growth.

Source: (fool.com)