Looking for social media stocks? Recently, you won’t find them anywhere except for the dumpster.
Over the past several weeks, investors have been dumping social media stocks as headwinds against the industry have piled up, including privacy issues, regulation concerns, sluggish user growth, stagnating margins, and stalled-out engagement.
Facebook (NASDAQ:FB) has dropped 13% over the past three months. Snap (NYSE:SNAP) and Twitter (NYSE:TWTR) are both down about 26% during that stretch.
But, I think it is time to get bullish on these beaten-up social media stocks.
The social media space isn’t dead. User growth is just maxing out. But, the digital ad shift remains as robust as ever. All those digital ad dollars will continue to follow digital engagement, which remains on social media. Plus, regulation and privacy concerns are overblown. And, margin headwinds related to improved security and safety spend are near-term in nature.
Consequently, I think social media stocks are a case of bad optics and strong fundamentals. Once those optics improve with better quarterly numbers, social media stocks should roar higher.
That includes Snap stock, the often-labeled “ugly duckling” of the social media space. The valuation on Snap stock looks compelling below $10, while my research indicates positive engagement and ad trends for Snap. From this perspective, I think Snap stock is worth a look below $10 and ahead of what I think will be a good Q3 earnings report.
Trends for Snapchat Are Favorable
Despite the Wall Street thesis that the sky is falling for social media stocks, I have noticed from a ground-level perspective that engagement for Stories-focused apps has actually been burgeoning lately. This is especially true for Snapchat, the app which started the Stories craze.
My ground-level insights are corroborated by broader market research. For example, in September alone, Snapchat has launched new shows with WorldStarHipHop and The Players’ Tribune, two organizations with broad millennial appeal.
Also in September, Warner Bros. purchased a Snapchat AR lens for its “The Nun” movie. That is part of a broader trend of big brands using Snapchat AR lenses to communicate with younger audiences.
In August, the highly influential and widely followed Ariana Grande used Snapchat to launch merchandise for her recent album exclusively through a selfie lens.
Also in August and on the e-commerce front, Adidas (OTCMKTS:ADDYY) pre-released a shoe exclusively through a Snapchat show, and the sneakers sold out.
Overall, it looks like the underlying trends for Snapchat are actually pretty good right now. Broadly speaking, it looks like Snapchat is adding important shows to boost engagement, finding great success in pushing its lenses as a unique advertising and branding opportunity, and finding equally great success in pioneering social e-commerce.
Those aren’t small things. They all have meaningful financial implications. Higher engagement means better DAU numbers. Lenses turning into a mass-market advertising tool means high digital ad ARPU. And, e-commerce becoming a thing on Snapchat means an entirely new commerce revenue stream.
From this perspective, I think Snap’s next quarterly earnings report will actually be quite good. I don’t expect it to be stellar (macro headwinds remain), but it will blow currently depressed estimates out of the water. That should be enough to provide serious firepower for this beaten-up stock.
Valuation on Snap Stock Looks Compelling
The other reason to like Snap stock here and now is that below $10, the valuation looks compelling.
Global digital ad spend is expected to reach $430 billion by 2022. Last year, Snap accounted for less than 0.5% of that global digital ad market. But, Snap has nearly 200 million daily active users, making it just a bit smaller than Twitter, who has ~225 million daily active users if you assume a Facebook standard 0.67 daily/monthly active user ratio.
Thus, it is safe to say that Snap could reasonably scale its revenue share of the digital ad market to Twitter’s base within the next five years.
Twitter controlled about 1% of the global digital ad market last year. Assuming a 1% share for Snap in five years, that would equate to $4.3 billion in revenues. Also assuming operating margins scale to about 25% by then, you are looking at potential profits of roughly $0.60 per share by 2022.
A Facebook and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) average 25X forward multiple on that implies a 2021 price target of $15.
Thus, in a very realistic scenario, SNAP stock offers 50%-plus upside over the next two to three years. That is a pretty good return profile and makes the valuation on SNAP stock today look compelling.
Bottom Line on SNAP Stock
The social media selloff is way overdone. Snap stock, as the ugly duckling of the industry, has been hit the hardest. But, underlying data suggests improving trends for engagement and monetization on the Snapchat platform, while the valuation on Snap stock looks compelling here. Thus, I think it may be time to get bullish on Snap stock as it falls below $10.
As of this writing, Luke Lango was long FB, TWTR, SNAP and GOOG.
