Social media company Snap (NYSE:SNAP) has had a 2019 to remember. Year-to-date, Snapchat stock is up nearly 185% as the company has regained user growth momentum, sustained robust revenue growth trends and dramatically improved its profitability profile.
But, 2019 is now coming to an end, and with it, the book closes on a terrific year for Snap. Does that mean the record rally in Snapchat stock is over?
No. Sure, coming into 2019, Snap stock was hated, beaten up, dirt cheap and positioned to fly on any good news. Good news happened. Snap stock flew higher. The opposite is true going into 2020. Snap stock is loved, red hot, richly valued and already priced for plenty of good news.
Despite all that, Snap stock can continue to head higher in 2020 because recent operational momentum warrants investor confidence and an extended valuation.
Indeed, my numbers suggest that Snap stock could break out above $20 in 2020. Here’s how that will happen.
Snap Has Good Momentum
As a business, Snap has good momentum at the current moment on the three fronts which it needs good momentum: user growth, revenue growth and margin improvement.
On the user growth front, Snap ran into some headwinds in 2018 as competitors — namely, Facebook’s (NASDAQ:FB) Instagram — copied core Snapchat features and stole users and engagement. But, in 2019, Snap rolled out new unique features, such as trendy face filters and original content. It also revamped its Android app to offset competitive headwinds and get back on a healthy user growth track. This healthy user growth should persist, because the Android tailwind is still in its early stages, while Snap’s international presence is still relatively muted (and most consumers internationally have Android phones).
On the revenue growth front, Snap has leveraged healthy growth trends to spark accelerated revenue growth. Exiting 2018, Snap’s revenue growth rates were 36% and falling. Today, Snap’s revenue growth rate is nearly 50% and moving higher. This robust revenue growth will persist, because healthy user growth will persist, and ad dollars follow eyeballs.
Lastly, on the margin improvement front, Snap’s gross margins have consistently moved higher every quarter, while the operating expense rate has consistently moved lower. These trends will persist, because Snap’s gross margins are still well below digital ad average gross margins.
Big picture: Snap reasonably projects as a big revenue growth company with sizable upside margin drivers. Ultimately, that means that this company’s profit growth trajectory will remain impressive, which should help power SNAP stock higher.
Snapchat Stock Could Reach $20
Snap’s long-term profit growth potential implies that Snapchat stock can head to and above $20 very soon.
Optimistically, I think Snap can continue to grow its user base towards 300 million users by 2025, will expand its average revenue per user rate to Twitter (NYSE:TWTR) levels by then, and will achieve digital ad average 80% gross margins with a 40% operating expense rate. Under those fairly aggressive growth assumptions, I believe Snap can hit $1.40 in earnings per share by 2025.
That represents huge growth from today — Snap is still reporting huge losses every quarter. But, this huge growth projection is warranted given the healthy momentum Snap has on the user, revenue and margin fronts.
Digital ad giants Facebook and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) fetch roughly 25x forward earnings multiples. At scale, Snapchat stock should fetch a similar multiple. Based on that multiple, $1.40 in 2025 EPS will fundamentally support a $35 price tag by 2024. Discounted back by 10% per year, that equates to a 2020 price target for Snapchat stock of well over $20.
That’s exactly where shares should trend in 2020 as the numbers here continue to impress investors.
Bottom Line on SNAP Stock
Snapchat stock doesn’t have huge upside potential from current levels. But, there is enough operational momentum and long-term growth visibility here to warrant shares continuing to grind higher.
How much higher? The next stop here will likely be $20, at some point in 2020.
As of this writing, Luke Lango was long FB.