Social media company Snap (NYSE:SNAP) reported first-quarter numbers on Tuesday, April 21, and they were nothing short of fabulous. As of this writing, SNAP stock is up more than 25% in response to the print.
Long story short, first-quarter numbers confirmed four things for SNAP stock.
- Snap was on fire before the novel coronavirus outbreak.
- The company has weathered the coronavirus storm in March and April with impressive resilience.
- All important financial trends continue to move in the right direction.
- SNAP stock is back on track to retake the $20 level in 2020.
I’ve said time and time and time again over the past two months that SNAP stock is a strong buy on this coronavirus-inspired dip.
First-quarter earnings confirm that, even though shares are up more than 100% from their lows, this stock is still a buy with another 25%-plus upside potential into the end of the year.
Snap Stock Was on Fire
Before the novel coronavirus outbreak hit the company in March, Snap’s ad business was absolutely on fire.
In January and February, Snap’s revenues rose 58% year-over-year. That’s the biggest revenue growth rate this company has seen since the fourth quarter of 2017. Back then, Snap’s quarterly revenues were $286 million. Today, they are at $462 million.
In other words, before the coronavirus outbreak, Snap was demonstrating accelerating growth at scale.
Part of this is because Snap users are spending more and more time in more easily “monetizable” segments of the app, like Discover and Shows (time spent with Discover content grew 35% year-over-year, while time spent with Shows was up more than 100% year-over-year). Part of this is because Snap has finally figured out how to deliver targeted and effective advertisements to its users.
Regardless, the bigger picture here is crystal clear: Snap’s ad business has a ton of momentum.
Weathering the Storm
Of course, as the coronavirus pandemic swept across the globe in March and April, advertisers everywhere cut their budgets. Snap’s 58% revenue growth trajectory fell off a cliff.
But not by as much as feared.
Many analysts and investors have been worried about 20%-plus declines in digital ad spending amid this outbreak, sparking concerns that Snap’s revenue growth rates could even go negative in the second quarter.
That’s not happening. Snap sustained 25% revenue growth in March. So far in April, revenues are up 15%.
It increasingly looks like the worst of the pandemic is over. Certain U.S. states and European countries are already starting to re-open. As things do re-open over the next few weeks to months, advertisers will re-up their budgets, and Snap’s revenue growth trends should improve in May and June.
Net net, Snap’s second-quarter revenue growth rate will likely come in north of 15% — and extremely impressive mark in the midst of a global economic shutdown.
Strong Financial Trends
All of Snap’s financial trends continued to move in the right direction in the first quarter. Users, revenues, and gross margins are going up, while the opex rate is going down and net losses are narrowing.
Daily active users rose more than 20% year-over-year, the biggest user growth rate Snap has reported since the second quarter of 2017.
Average revenue per user rose 20% year-over-year, too, while revenues rose 44% year-over-year, better than Q4’s revenue growth rate.
Gross margins came in at 47%, up 8 percentage points year-over-year. The opex rate came in at 64%, down 13 points year-over-year. Adjusted loss before interest, taxes, depreciation, and amortization shrunk from $123 million a year ago, to $81 million.
It is becoming increasingly obvious that Snap has long-term staying power in the social media landscape, and that the company has the ability to turn that staying power into a huge and highly profitable digital advertising business at scale.
Under that assumption, my modeling suggests that Snap will net $1.50 in earnings per share by fiscal 2025. Digital advertising stocks historically trade at 20-times forward earnings. Based on that historically average forward multiple and a 10% annual discount rate, $1.40 in 2025 earnings per share implies a fair 2020 price target for SNAP stock of over $20.
First-quarter earnings confirm that Snap has enough operational momentum to drive SNAP stock up to that level fairly soon.
Bottom Line on SNAP Stock
The long-term growth narrative supporting SNAP stock is robust. First-quarter earnings confirm that the company is actually gaining momentum on that robust long-term growth narrative, even in the face of Covid-19. Concurrently, shares remain attractively undervalued relative to the company’s long-term profit growth potential.
In other words, with SNAP stock, you have a long-term winner, with impressive near-term momentum, and an attractive valuation. That’s a recipe for success.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long SNAP.