Is SNAP a Buy?
Updated: Apr 18
75% of 13 - 34 year olds in six developed countries use Snapchat.
SNAP's stock is down nearly 60% from its all-time high.
Digital advertising spending is expected to reach $785 billion by 2025.
Last week, after reading The Washington Post’s story on Meta’s attempts to vilify TikTok, my thought was that Meta ($FB), formerly known as Facebook, is a dying. Facebook’s inability to convince teenagers to sign up to the platform, signaled the end of the company’s days as a high growth enterprise. TikTok has become the social media option of the youth, with 47% of its users belonging to Gen Z. As a private company there’s no direct way for the average investor to buy into TikTok’s success. Snapchat ($SNAP), the social media / camera company, is a public company, and has been popular with teenagers and young adults in the past. Could SNAP, the parent company of Snapchat, benefit from Facebook’s latest misstep?
Attracting younger users has been Meta’s problem, but it’s not a new problem. Before TikTok, SnapChat was the app of teens and young adults, and it still is. According to SNAP, 75% of 13 - 34 year olds in the US, the UK, Australia, France, and the Netherlands use Snapchat. Up until recently, Snapchat was the top app among teens.
The Stock's Past Performance
Despite SNAPs success with Gen Z, the stock hadn't been a big winner until recently. From the day of SNAP’s IPO to late December 2018, when the stock traded to under $6 per share, SNAP lost 69% of its value, the S&P 500 lost 1.8% of its value during the same timeframe.
When the markets rallied off of the March 2020 lows, SNAP rallied as well. From March 18, 2020 to September 24, 2021, SNAP’s stock price logged a 951% gain, topping the the S&P 500, which gained 94% over the same period.
Since trading to over $83 per share in September 2021, SNAP’s stock price has been in decline. The stock is down nearly 60% from its all-time high.
Sailing in the Right Waters
A rising tide lifts all boats. SNAP’s primary source of revenue is advertising. In 2021 the company’s revenue grew to $4.11 billion from $2.50 billion the year before. SNAP’s revenue accounts for less than 1 percent of the estimated digital advertising spend in 2021. The amount of money companies spend on digital advertising will continue to increase over the next several years. According to emarketer, digital advertising spending is expected to reach $785 billion by 2025. In 2021, digital advertising was believed to account for 64.4% of total advertising, up from 52.1% in 2019. As digital advertising spending grows, so should SNAP's revenue.
Revenue, Net Losses, and R&D
Snap has been able to grow its revenue every year since becoming a public company, but it is still not a profitable company. For what it is worth, net losses are shrinking. In 2021 SNAP reported a net loss of $488 million, which was a big improvement from 2019 when the company lost over $1 billion. With slight adjustments to research and development, the company could produce a profitable year. In 2021, SNAP spent 42.5% of its revenue on R&D. In the same year, Meta spent 20% of its revenue on R&D, and Twitter spent 24% of its revenue on R&D.
Though not profitable, Snap was able to generate positive free cash flow in 2021. The company generated $233 million in free cash flow last year compared to $(225) million in 2020. As of December 31, 2021 SNAP's cash, cash equivalents, and marketable securities totaled $3.7 billion, up from $2.6 billion in 2020.
SNAP’s stock is down nearly 60% from its all-time highs, it is far from a bargain when compared to other social media stocks. SNAP currently trades for 8.5 times forward sales. In comparison, Twitter trades for 6 times forward sales, Pinterest trades for 4.3 times forward sales, and Meta trades at 4 times forward sales.
The Augmented Reality is the Future
Snap is looking to augmented reality to enhance the platform’s experience for users and advertisers . In May of last year SNAP purchased augmented reality firm WaveOptics for $500 million, and in March of 2022 the company acquired Paris based startup NextMind, a neurotech company that develops brain-computer interface technology. NextMind’s sensors give users the ability to control objects using their mind.
There are signs that SNAP's augmented reality bet will pay. Beauty retailer Ulta, tried out an AR shopping feature on Snapchat, which resulted in $6 million in sales and more than 30 million product try-ons over a two week period.
Wall Street Predictions
On TipRanks, SNAP’s target price was listed at $53.41 per share, and it had a “moderate buy” rating. Of the 29 analysts rating SNAP, 20 believed the stock was a buy, while 9 had a hold rating on the stock.
There’s a bull case and a bear case to be made for SNAP. The company is swimming in the right waters. Social media advertising is forecasted to outpace television advertising in 2022, which will benefit Snapchat. The company’s investment in augmented reality has displayed signs of paying off, and SNAP could become a leader in augmented reality assisted shopping. Though the company isn’t profitable, a tweak to its investment in research and development could turn the company towards consistently profitability. Also the company has shown the ability to produce positive operating cash flow and positive free cash flow.
With 75% of 13 - 34 year olds in developed countries using the app, there is little room for massive daily active user growth amongst this demographic. In SNAP's 2021 annual report, the company stated that it achieved maximum market penetration among young users in developed markets, and that future growth in daily active users will need to come from older users in developed markets. Is this something SNAP can pull off? SNAP’s price-to-forward sales is higher than other social media companies, and its R&D spending as a percentage of revenue tops Meta and Twitter.
Can SNAP benefit from Facebook’s missteps? Probably not. Social media platforms appear to be tied to a particular generation. Facebook has Gen X, Snapchat has Millennials, and TikTok is getting Gen Z. Facebook has been unable to lure younger social media users to its platform, SNAP may soon face a similar problem. In a recent Piper Sandler survey of teens, teens named TikTok as their favorite social media platform, surpassing Snapchat for the first time. Can SNAP hit the $53.41 target set by Wall Street analysts? Probably, if the company’s investment in augmented reality pays off.