Benjamin RainsThu, December 10, 2020, 6:44 PM EST
Snap SNAP stock has skyrocketed 120% in three months from under $25 a share as Wall Street falls in love with its ability to boost its advertising business and continue to attract what Snap calls an “unduplicated and hard-to-reach audience.” And the firm that’s famous for its disappearing photo and video sharing app surged over 8% on Thursday after the FTC sued Facebook FB for “illegal monopolization.”
The simple, longer-term case for Snap stock is that it provides exposure to multiple, seemingly unstoppable forces: digital ad spending, mobile gaming and entertainment, and overall smartphone addiction.
Far from Disappearing…
Snap struggled for over a year after finding brief initial success following its March 2017 IPO, as investors worried that Facebook and its Instagram platform, which both copied many of Snap’s features, would eventually crush the firm. Investors also worried about the company’s inability to wow advertisers.
But Snap has slowly changed the story and it has the stats to back it up. Snapchat closed FY19 with 218 million daily active users, up 17%, while sales jumped 45% to $1.72 billion. Snap then closed Q3 with 249 million DAUs. The company also swung from an adjusted loss to positive earnings, with revenue up 52%.
Along with its ability to connect users with friends and family, it’s prepared to play a significant role in the future of entertainment.
The firm announced in late November its new Spotlight feature that aims to take on TikTok by allowing Snapchat users to produce content that has the ability to go viral. And Snap just reportedly teamed up with Twitter TWTR to allow Snapchat users to directly share tweets in a Snap for the first time.
Snap also constantly releases various augmented reality offerings and Lenses, and its Discover page is a hit with advertisers. Its “dedicated news product” called Happening Now has also grown in popularity.
On top of that, it has partnerships with Disney DIS, NBCUniversal, the NFL, and many other media outlets, as well as celebrities like Kevin Hart for Shows, which have attracted its younger audience who consume entertainment differently. The company said that total daily time spent watching Shows surged by 50% year-over-year in Q3.
Snap also dove into the mobile gaming market with Snap Games in the spring of 2019. And this is a good industry to be in since mobile is projected to account for roughly half of the global gaming industry that’s set to expand from $159 billion this year to over $200 billion by 2023. Alongside its other new efforts, Snap is exploring the best ways to grow its nascent e-commerce business.
Given all of its various offerings for the modern entertainment age, where people of all ages are glued to their smartphones, Wall Street has been pleased with Snap’s ability to attract more advertisers. This is key in an age where people pay to avoid ads on platforms like Netflix NFLX and Spotify SPOT. More importantly, overall digital ad spending surpassed traditional media buying in 2019, as more people disconnect from various forms of legacy entrainment.
The overall digital ad market is projected to reach $225 billion by 2024 in the U.S. alone, up from around $150 billion this year. And Snap has claimed that in the U.S. it continues “to reach more than 90% of 13 to 24 year-olds and more than 75% of 13 to 34 year-olds.” Those are mind-blowing numbers and that key demographic is harder to reach than ever.
With this in mind, 19 of the 27 brokerage recommendations Zacks has for Snap come in at a “Strong Buy” at the moment. We can also see that the stock has surged 275% in the last year from around $15 to the $53.19 a share that it closed regular trading Thursday, which marked a new high.
Thursday’s 8% jump came as Wall Street bets that any disruption to Facebook will benefit Snap and other smaller social media firms. But Snap doesn’t really need any help from FB, as it expands its reach with a key demographic of younger people.
Zacks estimates call for Snap’s Q4 revenue to climb 50%, with Q1 FY21 projected to jump another 48%. Meanwhile, its adjusted fourth quarter earnings are projected to climb 100%, with Q1’s loss expected to shrink significantly.
Overall, Snap’s fiscal-year sales are projected to climb 42% this year to reach $2.4 billion and then jump another 41% in 2021 to $3.4 billion. These estimates would represent four-straight years of between 41% to 45% top-line expansion, which is pretty impressive.
Snap is also projected to cut its adjusted loss from -$0.16 to -$0.10 a share this year. It’s then expected to surge all the way to positive +$0.21 a share next year. Plus, the company’s overall earnings outlook has climbed since its Q3 report with its FY20 consensus estimate up 50% and FY21 up 110%.
Snap is a Zacks Rank #3 (Hold) at the moment and the recent run has stretched its valuation picture. That said, at around $50 a share it’s one of the lower-priced consumer-focused tech stocks when we consider that Netflix trades at $500, AMZN at $3,100, and even Pinterest PINS at $71. This might help make it more enticing to some investors.
Price aside, Snap appears to be worth considering as a long-term bet on the new entertainment age. And don’t be too afraid to buy at new highs because timing the market is extremely difficult and it can prevent you from cashing in on big gains.
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