Social media Snap (NYSE:SNAP) is on a roll and that’s putting things mildly. Buoyed by better-than-expected first-quarter revenue (reported on April 22), Snap stock is up almost 52% over the past month.
The run also shows how badly drubbed the stock was during the March Covid-19 meltdown because even with the 52 percent gain over the past month and the more than doubling off its 52-week, Snap stock is higher by just 4.72% year-to-date.
While Snap’s recent rally could imply near-term upside is limited, a deeper dive reveals the opposite is true. The growth trajectory confirms as much.
A Closer Look at SNAP Stock
Social media is maturing, it’s still a growth industry – one where investors are yearning for the revenue increases and profit potential of younger Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook’s (NASDAQ:FB). That’s not to say those companies are done growing or will deliver lagging returns.
They remain titans with strong prospects and significant long-term upside potential, but the law of large numbers starts to kick in when talking about companies with market values of $903 billion (Alphabet) and $592.21 billion (Facebook). In that stratosphere, it’s hard to grow revenue by 30% or more on a consistent basis.
Snap, with a market capitalization of about $26 billion, is coming off a quarter in which it grew sales 44 %, indicating that while online advertising is still dominated by Alphabet and Facebook, advertisers are finding utility with Snap, too.
Favorable Comps
At its current market capitalization, Snap’s nearest social media comparison Twitter (NYSE:TWTR) at a market value of about $23 billion. They’re not identical twins or even cousins for that matter, but they’re both social media companies fighting for ad dollars. One – Snap – is thriving while the other – Twitter – is sagging.
While Snap’s first-quarter revenue growth was a blowout number, Twitter’s left investors disappointed. Add to that, spending growth – not necessarily the growth investors want – at Twitter is expected to outpace revenue increase over the near-term and its ad business is one of the flimsiest in the social media space.
Twitter CEO Jack Dorsey said that in the first quarter the company’s monetizable daily active users (mDAU) tally was up 14 percent year-over-year. At Snap, the number was far higher as daily active users increased.
“The firm’s average daily user count, or DAU, stood at 229 million, a 20% year-over-year increase helped by the lockdowns and quarantines,” according to Morningstar. “User growth was accompanied by an increase in both user engagement and time spent on the platform. Average revenue per user was up 20% from last year.”
Another reason to like Snap stock: an improving cash flow profile. While the company lost 8 cents a share in the first quarter, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $42 million, up from -$81 million. Operating cash flow surged to $72 million from $6 million while the all-important free cash flow (FCF) jumped to $73 million from -$5 million.
Bottom Line on SNAP
I won’t pull any punches. Snap, like so many companies this year, yanked 2020 guidance, citing the novel coronavirus pandemic and internet ad spending will likely retreat under a prolonged Covid-19 recession scenario.
Additionally, Snap isn’t cheap. It trades at 12.63x sales, but that multiple is palatable as long revenue growth is there to match, the aforementioned cash flow scenarios continue improving and if the company can milk more out of the direct response advertising business.
With the second quarter widely expected to be the worst for the U.S. economy, if Snap can keep its head above water and not report a loss that far exceeds Wall Street expectations while growing FCF, the second-half set for the stock could be enticing.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
