Wall Street is taking a short-term, overly negative view of Snap Inc (NYSE:SNAP) and SNAP stock. The large decline in the stock in the wake of Snap’s first quarter results, announced on May 1, was way overdone and has created a great buying opportunity in SNAP stock for investors.
Results Weren’t That Bad for SNAP Stock
SNAP’s results were not that bad. The company’s website, Snapchat, continues to grow and remains a top challenger to Facebook, Inc. (NASDAQ:FB). Snapchat’s average daily active user base rose by 4 million quarter-over-quarter and by 25 million year-over-year, reaching 191 million in the first quarter.
Meanwhile, its first quarter revenue slipped to $231 million from $286 million in Q4, but of course it’s important to note that the first quarter tends to be much slower than the fourth quarter from a seasonal perspective.
Considering that Snap’s revenue in the first quarter of 2018 was much higher than in the first quarter of 2017 ($150 million) and in the third quarter of 2017 ($208 million), last quarter’s top-line result wasn’t really so bad. Additionally, Snap noted that the “number of advertisers actively spending on our platform” jumped a very impressive “20 times” YOY.
But Wall Street got very upset because the company said that its “year-over-year revenue growth” would “decelerate significantly” this quarter due to declines in its ad prices. But it appears that the price declines reflect an effort by Snap to attract more advertisers to its platform rather than a meaningful weakening of its user base.
Similarly, some on the Street appear to have turned on SNAP because they believe that Snapchat’s user base declined at the end of last quarter versus the end of the fourth quarter due to impatience over a redesign that the website is undertaking.
Snapchat, however, clarified that its March average daily active user base was lower than its Q1 average but still above the Q4 level. Moreover, Snap pointed out that it was seeing “early signs of stabilization among our iOS users as people get used to the (website) changes.” The company did, however, add that it still needs to improve its design “especially..for Android users.”
Seeing the Forest From the Trees
Despite these headwinds, Snap’s overall outlook remains quite bright. Its user base and ad revenue both continue to grow, the number of marketers advertising on its website has surged tremendously, and it is one of only a few American social websites that have succeeded in a big way.
Moreover, Snapchat attracts many teenagers who, in a few years, will be consumers highly coveted by advertisers, meaning that demand for Snap’s ads should jump over the medium to long term, boosting Snap’s results and SNAP stock in the process.
Also noteworthy is that Snap could easily become a takeover target. Given the size and attractiveness of Snapchat’s audience and its success in the social realm, any of the FAANG companies (with the possible exception of Netflix, Inc. (NASDAQ:NFLX)) would probably be ready, willing and able to buy Snap for at least $20 billion.
Other possible acquirers include Chinese internet giants Tencent Holding/ADR (OTCMKTS:TCEHY), which currently has a 10% stake in SNAP stock, and Alibaba Group Holding Ltd (NYSE:BABA), as well as American internet conglomerate IAC/InterActiveCorp (NASDAQ:IAC).
Since SNAP stock is currently trading with a market cap of less than $13.5 billion, long-term investors will almost certainly get rewarded by either a significant takeover premium or a rebound in the shares.
As of this writing, Larry Ramer did not own shares in any of the companies mentioned above.