Social media stocks got a big boost last year as people sheltered in place amid the global pandemic. But with life slowly returning to normal, the group is facing its moment of truth.
At the peak of the pandemic in the U.S., social media app downloads spiked between the months of March and May across most of the major players, including TikTok, Facebook, Snapchat and Twitter.
As a result, the stocks of those companies also shined. Snap and Twitter were the strongest performers, rising a respective 207% and 69% in 2020. Facebook was up 33%, while the S&P 500 gained 16%.
However, after staying resilient through March of this year, social media app downloads have slowed significantly over the past two months. Since having more than 10 million app downloads in the U.S. in May of 2020, the TikTok app saw just 4.4 million downloads in May of 2021.
Facebook went from 5.4 million U.S. app downloads last March to 3.1 million, Snapchat from 3.2 million to 1.7 million and Twitter from 2.2 million to 1.4 million app downloads one year later.
Despite the slowdown in app downloads across the board, some of the social stocks are still surging. Facebook and Snap have both jumped about 20% this year and are continuing their outperformance. However, Twitter has been lagging behind both its peers and the broader market. Correlation doesn’t necessarily equal causation, but it’s important to note Donald Trump has not been allowed back on the platform since being banned on Jan. 6.
Investors may be a bit more cautious when it comes to Twitter's future, but the company has been taking vital steps to solidify its value proposition. Twitter’s CFO recently said e-commerce will be coming to the platform as it attempts to capitalize on direct-response advertising like rivals Facebook and Snapchat.
Advertising remains a critical aspect of social media businesses. Facebook derives almost all its revenue from ads. In 2020, the company reported advertising revenue accounted for nearly 98% of its overall revenue during the year.
There are a couple key challenges on the horizon for the social media stocks. First, competition in the space is stiff, with TikTok continuing to dominate and newer entrants such as live audio-only platform Clubhouse joining the fray.
While Clubhouse might still be small in size, its large-cap rivals including Twitter and Facebook have deemed it a worthy competitor. Twitter recently launched Clubhouse competitor Spaces, and Facebook is working on its own version.
Finally, regulatory overhang remains a tangible threat to the social giants. In order for Facebook and Snap to maintain their gains and Twitter to play catch-up, the companies will have to prove they are well positioned to fight off competition and sustain growth while monetizing their products effectively to drive long-term value.