Snap (NYSE:SNAP) got it’s mojo back in the first half of 2019. Shares tripled in value. But after reaching a high of $18.36 on July 26, shares have basically tread water until now. Snachat stock now goes for $16.78/share or about 8.6% off its highwater mark.
After easing off the gas late last year, is there more left in the tank? Could shares top $20/share in 2020? While digital ad trends could be on Snapchat’s side, valuation and competition remain top concerns.
Richly priced compared to social media peers Facebook (NASDAQ:FB) and Twitter (NASDAQ:TWTR), SNAP stock must meet (or beat) investor expectations to go even higher.
But with new apps like TikTok capturing critical mass amongst Generation Z, all bets are off whether Snapchat will become a Facebook-level dynamo, or languish as an also-ran social media company.
Let’s dig in, and see why the SNAP stock price may or may not top $20/share in 2020.
Snapchat Is Priced for Perfection
The bull case for SNAP stock hinges on continued ad spend strength. As InvestorPlace’s Luke Lango wrote on Jan. 6, increased corporate ad spend along with a presidential election cycle means a robust digital ad market in 2020. A rising tide lifts all boats. Alphabet (NASDAQ:GOOG GOOGL) and Facebook will reap the most benefit. But smaller social media platforms like Snap will benefit from more dollars chasing existing ad space.
But is this enough to justify the current SNAP stock price? Snap’s enterprise value-to-sales (EV/Sales) ratio is 14.5. This is leaps and bounds ahead of Twitter’s EV/sales valuation of 6.3, and materially higher than Facebook’s 8.5 EV/sales ratio. On the other hand, Snap’s growth trajectory explains the valuation discrepancy.
Analysts call for Snapchat stock to see sales growth around 36% in 2020, but Facebook isn’t exactly a dinosaur in the growth department. Analyst consensus calls for Facebook revenue to grow 21.8% in 2020. Twitter’s analyst growth estimate, albeit smaller, is 14.7%.
The SNAP stock price looks frothy today, but if revenue continues to grow at a 30%+ clip going forward, Snap can easily grow into its valuation, and then some. Yet, Snap’s rise to the top isn’t a slam dunk. Competition and slowing user growth could disrupt these plans.
Key Risks for SNAP Stock
Snap may be improving monetization, but SNAP stock could face issues in terms of user growth. In the Q3 earnings slides, Snap Inc. announced their daily active users (DAU) grew 13% globally year-over-year.
But most of this growth came from overseas. Snapchat’s North American user growth YoY was just 6%. In Europe? 9%. Rest of World? 28%. Snap has reached the peak in North America (Snap includes Mexico and Central America in this category). But to move the needle, Snapchat needs to grow international users and maximize their monetization.
SNAP is already doing fairly well monetizing foreign markets. Snap’s foreign monetization is well above that of say, Pinterest’s (NYSE:PINS). Snap’s average revenue per user (ARPU) in Q3 was $1.05 in Europe and $1.01 in the rest of the world. Pinterest so far only generates $0.13 per overseas user.
This could mean that Snap has already optimized overseas monetization. But JMP Securities’ Ronald Josey is in the “we ain’t seen nothing yet” camp. The analyst believes SNAP stock has the runway to catch up to rivals in monetization. Josey also believes the company could also see additional multiple expansion, despite the stock’s premium to peers.
Yet, competition and lack of generational diversity may disrupt upside for Snapchat stock. Past articles from InvestorPlace’s Tom Taulli attest to this factor. TikTok’s use among American teens is catching up to Snapchat. Facebook’s Instagram platform has successfully copied key features from the Snapchat platform.
Snap’s inability to grow its user base beyond Generation Z is another risk. Facebook user base went from Harvard undergrads to everybody’s grandma. The same can’t be said about Snapchat.
The Bottom Line on Snapchat Stock
With improving monetization, the Snap stock price has the potential to top $20/share in 2020, but the future has yet to be written. With shares trading at a high premium to social media peers, much of this upside is already priced into the stock.
In addition, user growth and competition could disrupt Snapchat stock. TikTok is capturing more of the youth market. Meanwhile, Snap has been unable to attain the cross-generational popularity of Facebook and Twitter.
But as SNAP stock bulls have discussed, the Snapchat platform benefits from a strong economy. Increased ad spend should sustain growth projections for SNAP stock. Until the economy starts to cool, it may not be worthwhile to short Snapchat stock.
So what’s the call? Consider a buy if the SNAP stock price dips. At current prices, there’s not enough upside to compensate for underlying risks.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
