Four Reasons Why Snap Stock Will Rally in the Near Future

SNAP stock - Four Reasons Why Snap Stock Will Rally in the Near Future

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Wall Street, as InvestorPlace’s Luke Lango pointed out recently, has obviously become very pessimistic about Snap (NYSE: SNAP), Snapchat and Snap stock. Some are predicting that Snapchat’s user metrics will keep dropping, dooming the website to irrelevance and causing SNAP stock to become a penny stock.

But Wall Street is often overly pessimistic and cautious. Remember, for instance, how poorly Facebook (NASDAQ: FB) stock fared in the wake of its IPO and how many on the Street were sure that the EU would disintegrate? Or how many analysts warned that Amazon (NASDAQ:AMZN) may never be profitable? Or how many analysts said that oil could drop to $10 per barrel?

The same irrational pessimism is coloring the Street’s view on SNAP stock in the wake of a slight weakening of the company’s user metrics in the second quarter. But SNAP stock will rebound over the medium to long term, as investors see that most young Americans are remaining loyal to the website, while the company’s average revenue per user will naturally rise. Moreover, SNAP stock will benefit from the company’s new partnerships and its new original programming, while Snap is a natural takeover target for many large tech companies.

Snap Is the Best Place to Reach Young Americans

As of March, 78% of Americans between the ages of 18 and 24 used Snapchat. And 71% of Snapchat users in that age range log on multiple times per day. Meanwhile, Facebook’s Instagram, often cited by Snap stock bears as a Snapchat killer, attracted 71% of Americans between 18 and 24 — and just 55% of those users say they log on multiple times per day.

Instagram and Snapchat both attract about 50% of Americans between the ages of 24 and 29.  Moreover, Snapchat’s user trends haven’t dropped very significantly since the first quarter of the year. Its daily active users fell only 2% compared with the first quarter. Seasonality and the frustration of a small number of users with changes in Snap’s Android app likely account for this tiny decline.  But there’s still no doubt that if you’re a marketer looking to reach young Americans, Snapchat is the best place to do so.

Snap Stock Will Benefit From Snapchat’s Natural ARPU Catalyst

As I pointed out in a column published on May 4, “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.”

That trend, which should provide a natural boost to Snap’s average revenue per user and revenue, may be taking hold sooner than I thought. Snap’s revenue jumped an impressive 44% in the second quarter to $262 million and its average revenue per user, or ARPU, surged 34% to $1.40, up from $1.05. Snap’s revenue and ARPU also jumped versus Q1, when its top line came in at $230 million and its ARPU was just $1.21.

Snap’s financial numbers, which will, at the end of the day, determine the fate of SNAP stock, are improving tremendously. Clearly, marketers are indeed ready to pay more to advertise on Snapchat as many of its users get jobs or go to college and start spending more money.

Snap’s New Initiatives Will Provide Powerful Catalysts for Snap Stock

In recent months, Snap has added partnerships with Amazon and Pandora (NYSE:P) and original programming. The partnership with Amazon will allow users to buy products on the extremely popular e-commerce website by taking pictures of the products. The feature should save users some time, since they won’t have to search for products on Amazon. And it should definitely be fun for Snap’s users who love shopping.  As a Forbes columnist stated, ” it’s difficult to imagine this not being embraced once the technology is worked out.” And the deal should generate significant revenue for Snap, boosting the company’s financials and SNAP stock.

Meanwhile, Snap’s partnership with Pandora and its original programming should make Snapchat more fun and “sticky”, pushing its user metrics meaningfully higher and giving Snap stock a boost.  Pandora is allowing its paid subscribers “to share their favorite songs, albums, stations, and playlists on Snapchat via music cards,” according to Digital Music News. And earlier this month, Snap launched new shows that will be streamed over Snapchat. “The shows will include drama, mystery, horror and comedy,” CNN noted.

Snap Stock Likely to Become a Takeover Target

Before deciding whether SNAP stock can be boosted by a takeover bid, it’s worth looking at a takeover from a few years ago and a recent takeover bid. In 2014, Facebook paid $19 billion for popular messaging service WhatsApp. Although WhatsApp had 600 million users in 2014, versus Snapchat’s monthly active user base of more than 300 million, WhatsApp’s revenue was a paltry $20 million at the time, while Snapchat’s revenue — just in Q2 — was over ten times that amount. Additionally, Snapchat has much higher penetration in the U.S. market than WhatsApp did in 2014, and Snapchat’s users spend an average of over 30 minutes per session on the website. That likely dwarfs the average time spent on WhatsApp.

But for the sake of argument, let’s say that the value of WhatsApp in 2014 and Snap stock in 2018 are roughly equivalent, except that we’ll add 10% to cover inflation over the four years and account for the stronger economy. That would create a takeover valuation of nearly $21 billion for SNAP — almost triple the company’s current enterprise value of $7.62 billion.

Additionally, Sirius (NASDAQ:SIRI) recently made an all-stock bid for Pandora that was valued at $3.5 billion. Although I’m very bullish on Pandora, own Pandora stock, and think that Sirius’ offer undervalued Pandora, I think it’s clear that Snapchat is many times more valuable than Pandora. After all, video ads are much more effective than audio ads, and Snapchat has so much more information about its users than Pandora has about its users. Additionally, ads on Snapchat can be much more targeted than ads on Pandora, and Snapchat can be much more creative with its content and partnerships. Finally, in the future, Snapchat can host many more lucrative businesses, such as money transfers.

Let’s conservatively say that Snapchat is five times more valuable than Pandora (we will also pretend that Sirius’ takeover bid did not undervalue Pandora). That would make Snap stock worth $17.5 billion, more than double the company’s current enterprise value of $7.62 billion.

As I’ve stated previously, many companies should be interested in buying SNAP at a premium to its current valuation. For instance, Amazon and Alibaba (NYSE: BABA) would love the opportunity to advertise their websites and products on Snap for free, while Google would be able to realize its longtime goal of obtaining a major, viable social website and Facebook would be able to eliminate a huge competitor.

Bottom Line on Snap Stock

Snap’s unique ability to enable marketers to reach young Americans, along with its built-in ARPU catalyst and its new content and partnerships, will enable Snap’s results to improve going forward. Meanwhile, Snap will eventually become a takeover target, assuming that Snap stock doesn’t skyrocket, making it too expensive for anyone to buy.

Longer term investors should definitely buy SNAP stock at current levels.

As of this writing, Larry Ramer owned shares of Pandora. 


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