Despite the tiny drop in its daily active users last quarter, Snap (NYSE:SNAP) and Snap stock have many strong, positive catalysts. Moreover, it is definitely not, as some have said, going to disappear like MySpace, and there is a very good chance that it will be acquired in the next year or two.
Catalyst 1: Multiple, Positive User Trends
The number of daily active users of Snap’s website, Snapchat, inched down 2% in the second quarter, compared with the first quarter. However, the company’s daily active user total rose 8% year-over-year.
Snap blamed the quarter-over-quarter decline on an ongoing redesign of its website, meant to improve the experience of those who visit the site on Android devices. Moreover, Barclays analyst Ross Sandler agreed that the redesign caused the decline and predicted that the redesign would be completed by the end of this year, according to The Fly.
Predicting that last quarter may have been the last DAU drop for Snapchat, Sandler believes that the website’s user totals could rebound going forward, and he kept a $16 price target and an “Overweight” rating on the shares. In other words, there’s a very good chance that once this redesign is complete, the company’s user totals will rebound again.
Additionally, other user metrics were positive. In addition to the YOY increase in DAUs, user retention among those older than 35 rose 8% last quarter. Also, the retention of new Android users has jumped 20% since the fourth quarter of 2016, while the users of the website continue spend an average of over 30 minutes per day on it.
Catalyst 2: Positive Revenue Trends
Meanwhile, Snap’s stronger-than-expected results and large YOY revenue increases show that it has multiple positive catalysts. Sandler cited the transition to a programmatic ad system, which was launched slightly less than two years ago, as a key catalyst for the strong financial results.
Indeed, the company’s revenue from programmatic advertising jumped 34% sequentially and 485% YOY, helping to spark overall advertising revenue jumps of 48% YOY and 14% sequentially.
Another likely positive catalyst is the aging of the company’s core audience. Although the website is known for attracting users in their teens, people don’t stay in their teens forever. As these children become adults and start getting jobs and spending much more, they become much more appealing to advertisers.
I believe that Snap’s financial results are starting to benefit from that trend. Eventually, Snap stock will also rally as investors start to notice.
Catalyst 3: Showing Ads Users Want to See
Furthermore, Snap appears to use a different approach to advertising than Facebook (NASDAQ:FB).
While the latter social network allows advertisers to target any users they want, Snap appears to worry much more about ensuring that users are only shown ads that are very likely to appeal to them. (Of course, like Facebook, Snap has a great deal of information about its users that it can utilize for ad-targeting purposes.)
On Snap’s Q2 earnings conference call, the company’s chief strategy officer, Imran Khan, said:
“We really focus on showing the most relevant ad to the most relative users, because even if I shown you one ad that is completely annoying that reduce your user experience. And if I show you five really good great that ad that you are engaging with them that drives better user experience.”
This approach, over time, has likely driven much better ad response rates and saved advertisers money, enabling Snap to retain its current advertisers and attract new ones, boosting Snap’s results and SNAP stock.
Catalyst 4: Overseas Growth
Also unlike Facebook, Snapchat still has a tremendous amount of room to grow overseas. Revenue from countries outside of North America accounted for 32% of the company’s total revenue, up from 17% in the same period in 2017.
That figure indicates that the company’s revenue from overseas is growing extremely rapidly, and that trend is likely to continue for some time as Snapchat’s footholds in other countries rapidly expand.
Furthermore, also unlike Facebook, which is bogged down in enhancing its security, Snapchat is undertaking interesting, new, high-tech initiatives.
For instance, Snap has released “new augmented reality experiences that can be shared with friends” known as Snappables, and it recently launched Lens Explorer which allows uses to browse “thousands of lens.” Lens are images that can be placed over people on photos.
Some have compared Snap to MySpace, suggesting that it’s a passing fad that will disappear. But in actuality, the advent of Facebook is what caused MySpace to disappear. Snapchat has already conclusively shown that it can successfully compete with Facebook, so unless another social website comes and vanquishes them both, Snapchat will not suffer the same fate as MySpace.
Catalyst 5: Snap Stock Is a Potential Takeover Target
And finally, even in the unlikely event that Snapchat’s user metrics continue to erode and its revenue growth radically slows, someone (think Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Verizon (NYSE:VZ) or AT&T (NYSE:T)), will pay a hefty premium on Snap stock to acquire the company. That personalized data and ad revenue are simply worth too much for giant companies to pass up.
With its positive catalysts, promising innovations, staying power, and strong appeal as a takeover target, SNAP stock should definitely be bought by growth-oriented investors at current levels.
As of this writing, Larry Ramer did not own shares in any of the aforementioned securities.