Advertiser Appeal and Innovations Will Continue to Lift Snap Stock

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One of my favorite stocks of 2019, Snap (NASDAQ:SNAP), rallied tremendously after reporting much stronger than expected first-quarter results on April 21. Specifically, SNAP stock surged from a closing price of $12.44 on April 21 to $17.01 at the close on April 22.

Advertiser Appeal and Innovations Will Continue to Lift Snap Stock

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I believe that, as I predicted last year, Snapchat is becoming more appealing to advertisers as its users age, get jobs, and obtain disposable income. Further, this trend, along with its content and advertising innovations, leave it well-positioned to continue to greatly increase its financial results going forward.

And Snap stock is superior to Facebook (NASDAQ:FB)because Facebook has multiple negative catalysts that Snap does not have, while Facebook has much less room for growth. As more investors become aware of those differences, Snap stock will probably continue to rally, while Facebook’s shares will likely keep languishing.

Ad Appeal and SNAP Stock

In 2019, I predicted that Snap would attract more advertisers as the website’s key users entered the workforce. That trend does appear to be occurring, as the company’s revenue surged an astounding 44% year-over-year, surpassing analysts’ average estimate by 11 percentage points.

The company’s top line soared 58% year-over-year in January and February, before the novel coronavirus crisis occurred in the U.S. and Europe.

Its ad revenue proved to be pretty resilient to the crisis, surging 25% YOY in March and 15% in the first few weeks of April. That shows the great extent to which advertisers are valuing Snap’s  ability to effectively reach tens of millions of millennials and members of Generation Z.

Finally, the company even managed to generate positive operating cash flow for the first time. Although Snap only delivered $6 million of operating cash flow and its earnings per share and free cash flow were negative, the company is clearly close to becoming profitable. Of course, that’s a very important phenomenon for SNAP stock.

Innovations Fuel Snap’s Strength

Snap’s direct response ads are proving to be very popular with marketers. The company’s direct response ads generated half of its ad sales last quarter. On its Q1 earnings conference call, CEO Evan Spiegel said that advertisers “who provide activities or products that users can enjoy at home” saw especially strong benefits from direct response ads.

Snap is also allowing marketers to target ads to the website’s users who are most likely to make purchases, based on their history. Further, it’s continuing to increase its use of augmented reality to pitch advertisers’ products.  And, in a note to investors, research firm Oppenheimer called the company’s video ad strategy “promising.”

That makes sense since more than 60 of Snapchat’s shows are now watched by more than 10 million people per month and the amount of time that its users viewed its shows “more than doubled year-over-year in Q1,” Spiegel reported.

A quote by e.l.f. cosmetics Chief Marketing Officer Kory Marchisotto, read by Snap’s Chief Business Officer, Jeremi Gorman, during the conference call, summarizes why advertisers value Snap so much.

“Our message is clearly resonating with Snap’s core Gen Z and millennial audience. We utilize Snap ads to efficiently help our consumers shop for new eye, lip, face and skincare products and implemented dynamic ads to further optimize and personalize our ads for customers. We continue to innovate and optimize across Snap ecosystem which has led to significant drops in (cost per customer acquisition).”

In other words, marketers are using Snap and its innovative ad techniques to effectively and cheaply reach young consumers and sell them their products.

Less Risky Than Facebook

Snap’s huge ad revenue growth in January and February indicates that it’s taking share from Facebook and Instagram. I believe that is occurring because Snap’s content and marketing techniques are more innovative and effective at reaching young consumers than those of Facebook and Instagram.

Meanwhile, Snap likely will not have to ramp up its IT security spending as much as Facebook has. That’s because Snap has not had the intense privacy lapses that Facebook has experienced.

Further, unlike Facebook, Snap does not seem to have been greatly affected by the changes that Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) made to Google’s cookie sharing policies.

Finally, Snap only has a market cap of $23.63 billion, versus Facebook’s $576 billion. As a result, Snap’s stock has much more room to run than Facebook’s shares.

The Bottom Line on SNAP Stock

In a note to investors following Snap’s results, research firm Bernstein predicted that the use of Snap’s app would “remain strong” and added that the company’s “advertiser mix and [direct response] product expansion offer downside protection.”

The firm raised its price target on the shares to $18 from $16 and kept an Outperform rating on the stock.

Like Bernstein, I expect Snap to remain very popular and expect it to benefit from its advertising innovations and its appeal to high-spending advertisers. But I think that SNAP stock, driven by the company’s growth and attraction of investment dollars from Facebook’s shares, can easily reach $22 this year. As a result, I recommend that investors buy Snap’s shares.

As of this writing, Larry Ramer did not own any of the aforementioned stocks. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.


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