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Hard-Hit Social-Media Stocks Could Be a Buy – Morningstar.ca

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Meta Platform’s (FB) mixed earnings results and stock slide is pulling down other social media shares, and in the process pushing them further into undervalued territory. Twitter (TWTR) , Snap (SNAP), and Pinterest (PINS) have each taken a hit Thursday along with a more than 25% dive in Meta, Facebook’s parent company.

However, these social media stocks are also deeply undervalued by Morningstar’s valuation metrics. Even before Thursdays sell off, Snap and Pinterest were in 5-star territory, the level considered the most under valued in our Star Rating system for stocks.

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Exhibit 1

The revenue headwinds facing social media stocks are most likely short term, says Morningstar senior equity analyst Ali Mogharabi. “With that, their top-line growth will still be impressive (mainly PINS and SNAP).”

“FB is of course maturing and with already billions of users, a much higher rev growth deceleration is expected,” he says. “Even with margin pressure as it invests in new products (metaverse, etc.), 30-35% operating margin is impressive. And I think those margins can expand in 2023 when higher demand for ads in Reels drive up ad prices (as mentioned in the note), either stopping or maybe even reversing the slowdown in ad rev growth, which will also help margins.”

Michael Hodel, director of equity research, media & telecom at Morningstar, notes that one of the unknowns hamstringing these stocks is whether online time will increase at anything close to the same rate it has over the past couple years, especially in developed markets. “That at leaves FB and its peers looking to steadily increase ad effectiveness to help push ad prices higher. To me, this is the million dollar question: will data privacy policy changes at Apple, etc. or increased regulation offset any effort to improve ad formats and targeting mechanisms over time?”

Here are some highlights from Mogharabi’s recent commentary on Twitter, Snap and Pinterest. Mogharabi’s note take on Meta can be found here.  

Exhibit 2

Twitter

“Twitter has captured the attention of nearly 200 million daily active users, including prominent celebrities and public figures worldwide. Its access to, and interactions around, real-time information and content create value for its users and for advertisers. While Twitter user growth has accelerated since 2018, a potential slowdown remains a concern. Slower user growth could make higher user monetization more difficult as advertisers may allocate a bit more toward other platforms such as Snap, which has a faster-growing user base. We do not believe that Twitter has carved out an economic moat.

Our fair value estimate is $58 per share, equivalent to 2021 enterprise value/adjusted EBITDA and enterprise value/sales ratios of 27 and 8, respectively. The ad market appears to have rebounded from the pandemic faster than we had expected, though we expect Twitter will continue to lag its peers in attracting direct response ad dollars. Top-of-the-funnel ad campaigns should continue to help, though, especially as live events such as sports return. We project modest growth in Twitter’s user base, due to the established presence of larger social networks such as Meta and Instagram and faster-growing ones such as Snapchat and Pinterest. As engagement improves, we think Twitter will be able to attract its fair share of ad dollars.”

Snap

“Snapchat, which has captured 265 million users to date, most of whom are between the ages of 18 and 24. We believe that Snap and its users benefit from a network effect among its customer base and is starting to attract the attention (and dollars) of advertisers with a growth trajectory toward nearly $3.8 billion in revenue. However, there is no guarantee that Snap will effectively monetize these users consistently. In turn, we are not yet convinced about the firm’s ability to generate excess returns on capital over the next decade. Ultimately, Snap’s competition, which includes wide-moat Facebook with 2.8 billion users, is overwhelming, in our view. In particular, Instagram, owned by Facebook, may emerge as a substitute for Snapchat. The larger ecosystems of Snap’s competitors may have also created somewhat of an exit barrier for their users, which we think could further limit the growth acceleration of Snapchat users. In addition, growth in new users, user engagement, and time spent on Snapchat may face a natural limit in the long run as customers only have so much time to give to various mobile app interactions each day. TikTok, a video-sharing firm with China’s ByteDance as its parent company, is another formidable competitor of Snap.

Our fair value estimate for Snap is $70 per share, which represents an enterprise value/sales multiple of 20 in 2022. We project tremendous revenue growth for Snap at a 10-year average rate of 30%. Within our discounted cash flow model’s initial 10-year projection, we have assumed that Snap will become profitable in 2023 and will improve its current operating loss to an operating margin of 40% by 2030. Snap’s revenue growth will be driven primarily by growth in the firm’s daily active users, or DAUs, user engagement, overall online advertising spending, more adoption of the augmented reality ad format, and an increasing allocation of online ad dollars toward mobile and social network ads, in addition to the firm’s more aggressive monetization of Snap Map, Communication (chat, minis, and games), and camera. We expect recovery from COVID-19 to further boost top-line growth.”

Pinterest

“Pinterest, an online product and idea discovery company, is focused on carving out a piece of the global digital advertising space. While we don’t expect Pinterest to displace online advertising behemoths Google and Meta or up-and-coming Amazon, we do expect it to attract a small pinch of digital ad spending, which we estimate is an addressable market of more than $600 billion.

Pinterest has a narrow economic moat and stable moat trend based on network effects and intangible assets (data), which we think can eventually drive the company to profitability and excess returns on invested capital. With more than 475 million average monthly users who access Pinterest with the intention of not only discovering ideas or products but also purchasing them immediately or in the future, we think the firm can attract more online ad dollars. In our view, Pinterest can attract various types of ad campaigns through the marketing funnel–from broad exposure or awareness to targeting and actual conversion. We think opportunities exist for the firm to gradually increase its share of the U.S. digital advertising market, as well as grow internationally (mainly in Europe) in terms of both users and ad dollars collected from this audience

We expect higher user growth in 2022 and beyond as the impact of the pandemic, which pulled user growth forward, will be lapped. We also expect the firm’s latest offerings that attract content creators and improve users’ shopping and purchasing experiences on the platform to drive user growth. In addition, we think some advertisers will come back after macro issues related to supply chain and labor shortage are resolved. Plus, as expected, Apple’s policies appear to have hit Pinterest less than some of its peers. Until then, however, we now assume a further decline in U.S. users and a deceleration in overall user growth for Pinterest during the remainder of (2021). In our view, narrow-moat Pinterest remains attractive. We also think after the return of consistent and stable user growth to the platform the firm may become an acquisition target again.”

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India’s media – captured and censored

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Across almost every form of media in India – social, broadcast and print – Narendra Modi and the BJP hold sway.

With India amid a national election campaign, its news media is in sharp focus. Until recently it was believed that the sheer diversity of outlets ensured a range of perspectives, but now, India’s mainstream media has largely been co-opted by the Bharatiya Janata Party and Prime Minister Narendra Modi. Just how did the media in India get to this point and what does it mean for the upcoming elections?

Featuring:

Ravish Kumar – Former Host, NDTV
Shashi Shekhar Vempati – Former CEO, Prasar Bharati
Pramod Raman – Chief Editor, MediaOne
Amy Kazmin – Former South Asia Bureau Chief, Financial Times
Meena Kotwal – Founder, The Mooknayak

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Social media lawsuit launched by Ontario school boards

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Premier Doug Ford says that lawsuits launched by four Ontario school boards against multiple social media platforms are “nonsense” and risk becoming a distraction to the work that really matters.

The school boards, including three in the Greater Toronto Area, have launched lawsuits seeking $4.5 billion in damages against Snapchat, TikTok, and Meta, the owner of both Facebook and Instagram, for creating products that they allege negligently interfere with student learning and have caused “widespread disruption to the education system.”

But at an unrelated news conference in Ottawa on Friday, Ford said that he “disagrees” with the legal action and worries it could take the focus away from “the core values of education.”

“Let’s focus on math, reading and writing. That is what we need to do, put all the resources into the kids,” he said. “What are they spending lawyers fees to go after these massive companies that have endless cash to fight this? Let’s focus on the kids, not this other nonsense that they are looking to fight in court.”

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Four separate but similar statements of claim were filed in Ontario’s Superior Court of JusticSocial media lawsuit launched by Ontario school boards pervasive problems such as distraction, social withdrawal, cyberbullying, a rapid escalation of aggression, and mental health challenges,” Colleen Russell-Rawlins, the director of education with the Toronto District School Board, said in a news release issued Thursday.

“It is imperative that we take steps to ensure the well-being of our youth. We are calling for measures to be implemented to mitigate these harms and prioritize the mental health and academic success of our future generation.”

The school boards are represented by Toronto-based law firm Neinstein LLP and the news release states that school boards “will not be responsible for any costs related to the lawsuit unless a successful outcome is reached.”

These lawsuits come as hundreds of school districts in the United States file similar suits.

“A strong education system is the foundation of our society and our community. Social media products and the changes in behaviour, judgement and attention that they cause pose a threat to that system and to the student population our schools serve,” Duncan Embury, the head of litigation at Neinstein LLP, said in the new release.

“We are proud to support our schools and students in this litigation with the goal of holding social media giants accountable and creating meaningful change.”

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Ontario school boards sue social media giants for $4.5B

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Four major Ontario school boards are taking some of the largest social media companies to court over their products, alleging the way they’re designed has negatively rewired the way children think, behave and learn and disrupted the way schools operate.

The public district school boards of Toronto, Peel and Ottawa-Carleton, along with Toronto’s Catholic counterpart, are looking for about $4.5 billion in total damages from Meta Platforms Inc., Snap Inc. and ByteDance Ltd., which operate the platforms Facebook and Instagram, Snapchat and TikTok respectively, according to separate but similar statements of claim filed Wednesday.

“These social media companies … have knowingly created a product that is addictive and marketed to kids,” said Rachel Chernos Lin, the chair of the Toronto District School Board, on CBC Radio’s Metro Morning on Thursday.

“We need them to be held accountable and we need them to create safer products.”

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Social media giants ‘knowingly’ harming children, TDSB chair says in wake of lawsuit

3 hours ago

Duration 5:53

Four of Ontario’s largest school boards, including the Toronto District School Board (TDSB), have launched lawsuits against social media giants behind Meta, Snapchat and TikTok for allegedly causing harm to students. Metro Morning host David Common spoke with TDSB chair Rachel Chernos Lin about the action.

The allegations have yet to be proven in court, and there is no set date for when they will be heard. CBC Toronto has reached out to the companies named for comment.

The school boards, speaking under a new coalition called Schools for Social Media Change, allege students are experiencing an “attention, learning, and mental health crisis” because of “prolific and compulsive use of social media products,” in a news release.

They allege the platforms facilitate and promote cyberbullying, harassment, hate speech and misinformation, and have a part in escalating physical violence and conflicts in schools, according to the statements of claim.

They also argue these apps are “purposefully designed” to deliver harmful content to students dealing with topics such as suicidal ideation, drugs, self-harm, alcohol, eating disorders, hate speech and sex — particularly content encouraging “non-consensual” sexual activity.

Trying to respond to those problems has caused “massive strains” on the boards’ funds, including in additional mental health programming and staff, IT costs and administrative resources, the release says. The boards call on the social media giants to “remediate” the costs to the larger education system and redesign their products to keep students safe.

Lawsuit may be first of its kind in Canada

Hundreds of school boards in the United States, along with some states, have launched similar lawsuits against social media companies.

Last fall, over 30 states accused Meta Platforms Inc. of harming young people’s mental health and contributing to the youth mental health crisis by knowingly designing features on Instagram and Facebook that cause children to be addicted to its platforms.

In an email, a spokesperson for Snap said Snapchat was “intentionally designed to be different from traditional social media.”

“Snapchat opens directly to a camera — rather than a feed of content — and has no traditional public likes or comments. While we will always have more work to do, we feel good about the role Snapchat plays in helping close friends feel connected, happy and prepared as they face the many challenges of adolescence.”

What social media scrolling is doing to kids’ brains

5 months ago

Duration 7:52

With most children and teenagers spending hours a day on a smartphone, CBC’s Christine Birak breaks down what research shows about how using social media is changing kids’ behaviour, if it’s rewiring their brains and what can be done about it.

Neinstein LLP, a Toronto-based firm, is representing the school boards. The boards will not be responsible for any costs related to the suit unless a successful outcome is reached, the release says.

Duncan Embury, a partner and head of litigation at Neinstein, told CBC News the named companies are “mainly responsible” for the social media products that kids use, and share “common” designs or algorithms that lead to “problematic use.”

To his knowledge, this is the first case of its kind in Canada.

“Based on what we’re seeing and what we’re hearing from our educators, I think this is a problem that is pervasive across our system and I wouldn’t be surprised if there [were] more boards that took this step,” said Embury.

Ford ‘disagrees’ with move

At an unrelated news conference on Thursday, Ontario Premier Doug Ford said he “disagrees” with the schools boards’ lawsuits.

“What are they spending on lawyer fees to go after these massive companies that have endless cash to fight this? Let’s focus on the kids, not about this other nonsense that they’re looking to fight in court,” he said.

WATCH | Ford disagrees with school board lawsuits against social media companies:

Ford disagrees with school board lawsuits against social media companies

2 hours ago

Duration 0:41

Ontario Premier Doug Ford responded to news Thursday that four major school boards in the province are suing some of the largest social media companies over alleged harm to young people, saying he disagrees with the boards’ action. “Let’s focus on the kids, not about this other nonsense,” he told reporters.

CBC News spoke to parents with children who attend schools in the Toronto District School Board. While they all agree social media apps are a problem, they differ in what approach they think should be used to regulate them.

“Just take the phones away,” said Gillian Henderson.

“I don’t think we need to sue anybody, that seems like a long, expensive process. Just take away their phones in class and give them back to them when they need them.”

The board has recently moved to develop a policy to limit cellphone use in classrooms, which includes potential phone bans and social media restrictions. It previously said staff had problems enforcing policies stating students should only use phones for educational purposes only.

Two separate pictures of a woman and a man shown together.
Gillian Henderson and Shyon Baumann have children who attend schools in the Toronto District School Board. Henderson thinks schools should take students’ phones away in class, while Baumann says it may be helpful to force tech giants to decrease harm from their apps through the court system. (Paul Smith/CBC)

Shyon Baumann said school boards could use some help in reducing screen time.

“If the school boards can do what they can trying to police it, that would be great. But it would be also great if the app creators did what they could to make the harms decrease,” he said.

“If they’re not going to make voluntary changes, then maybe doing it through the courts is the most effective way.”

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