For a company whose stock looked bound to break into single digits, Snap Inc (NYSE:SNAP) is hardly a short-sellers favorite. Despite a short float nearing 20% of shares, SNAP stock jumped by around 30% in the last month alone, which is confounding.
What is going on and is Snapchat stock still relatively a good buy?
Barclays’ Ross Sandler set an $18 price target on SNAP stock and issued a “buy” rating earlier this month. Rated five stars by tipranks, the analyst is right 69% of the time, with his stock calls returning around 24% on average (over a two-year period).
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Still, this one “buy” recommendation is not a big enough reason to explain the rally. After all, only 6 of the 22 analysts covering Snap Inc. rate the stock a “buy,” while 10 are neutral (with a hold) and another 6 say it’s a stock to sell.
Maybe investors are tired of Facebook, Inc. (NASDAQ:FB) stock trading nearly flat in the past month. Or maybe the 10 percent monthly surge in shares of Twitter Inc. (NYSE:TWTR) is giving speculators the confidence that SNAP stock is undervalued.
Fundamentally, Snapchat is losing to Facebook and the business is not making any money. Its growth depends exclusively on the U.S. market. While marketers value the U.S-based user highly, Snap does not have a growth strategy in bigger markets like China. Conversely, WeChat, which Tencent developed, has 800 million users.
Snap badly needs international growth, so targeting the Chinese market would make the most sense. Unfortunately, China will not likely let Snap run its business there. Even Facebook’s WhatsApp is having a hard time growing, due partly to the intermittent availability of the chat app.
Still, Tencent bought 12% of SNAP stock on Nov. 8. Either the China-based firm is buying SNAP stock cheaply or wants the disappearing instant messaging app maker to build its business in China.
Take Profits or Hold?
Shareholders of Snap Inc. are in a tough spot. Those who bought the stock as an IPO, paying as much as $29.44 for shares, are still deeply underwater. But bottom-fishers who bought the stock at the yearly low of $11.28 will have made a solid profit in just over a month. Since earnings per share will drop by 38% from last year, but grow 12% next year, few should expect Snap to break-even in that time.
Snap could not even manage to grow its average CPMs (cost per thousand) in the third quarter. Snap explained that the transition to the auction format, instead of direct sales, led to most of its revenue growth being dependent on higher impressions. However, the company believes that the transition will ultimately lead to better business scalability and ROI. Given the stock’s rally in the past month, investors appear to believe Snap will deliver on accelerated growth in the quarters ahead.
The higher advertising volumes on the app did not hurt usage in the last quarter. User engagement continued to grow, while time spent, frequency of use and content creation all increased as well. In fact, Snap ad impressions grew fourfold from last year in the third quarter. Advertising revenue grew 59% in the period to $204 million. If Snap keeps up with that quarterly pace, then analysts will have to raise their earnings growth forecasts.
Final Word on SNAP Stock
Such bullish research notes could send the stock even higher. It is no longer impossible to think that SNAP stock will stay in the teens, as the company’s growth rates seem to assure the stock will not fall into the single digits again any time soon.
From a valuation standpoint, Snap is not a good buy by any means — but neither were Facebook or Twitter early on.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities. For more on technology stocks like SNAP, subscribe to the author’s DIY Value Investing newsletter.
