Shares of Snap (NYSE:SNAP) stock dipped in late July after the social media company reported what were ostensibly strong second-quarter numbers.
Revenues topped expectations. Profits did, too. Yet SNAP stock slid more than 5%. Why? Mostly because user growth lagged expectations while management sounded a cautious tone about revenue growth trends slowing in August and September.
Long-term investors shouldn’t be alarmed by this selloff. Indeed, they shouldn’t even be that concerned.
It was a solid print. The underlying growth trends remain vigorous. Management is doing everything right to maximize the value of the company. Snap is still on a robust, multi-year growth trajectory. And SNAP stock is now undervalued on the heels of this post-earnings selloff.
So buy the dip in SNAP stock.
Here’s a deeper look.
SNAP Stock Reported Solid Earnings
Despite the selloff in SNAP stock, the company’s second-quarter earnings report was quite good.
Users rose 17% year-over-year. Average revenue per user (ARPU) was flat. Revenues rose 17%. Gross margins were up one point. The operating expense rate was basically flat. The operating loss margin narrowed by 11 points.
Snap did all of that against the backdrop of a global pandemic, or more specifically, a global economy in shut-down mode. It grew its user base and revenues, stabilized margins and improved the profitability profile.
That’s pretty impressive.
What’s more impressive is that July revenues are up 32% month-to-date. Yes, management expects that trend to slow in August and September, as usual ad spending on seasonal events essentially gets wiped out. But that’s a one-off headwind.
The bigger picture is that Snap’s revenue growth trends are steadily improving. And that at the current pace, Snap should be back to normal growth by the fourth quarter of 2020.
In sum, then, Snap’s second-quarter earnings report was actually pretty good.
Strong Long-Term Growth Drivers
More important than the numbers, the underlying trends in the second-quarter earnings report strongly imply that management is making all the right moves to set up Snap for sustained, huge long-term growth.
Management is building out a robust ecosystem around the app’s best and most distinguished feature: private chat. This includes developing a deep repository of signature, augmented reality lenses which young consumers are absolutely nuts about. It also includes rolling out Minis, which are essentially tiny, built-in apps that can be used within the chat feature.
These product innovations underscore that Snap remains on track to become a nearly ubiquitous private communication platform for young consumers. Sure, monetizing private communication through ads is tough. But that’s why management is rolling out things like Minis, through which Snap can monetize private communication by becoming its own mini App Store and charging companies to have their apps integrated into Snap private chats.
Even further, management continues to flesh out its Discover channel with new content and shows. Discover — while coming under intense competition from ByteDance’s TikTok recently — is still part of a rising tide of increased consumer engagement in mobile video. So long as management keeps populating Discover with compelling content, app engagement will rise.
On the revenue side of things, Snap also continues to improve its ad product. Most recently, the company launched Dynamic Ads globally. This is a step in the right direction toward creating an ad product that rivals those offered by Facebook (NASDAQ:FB) and the like.
Snap is also pushing down the e-commerce road, fleshing out Brand Profiles in an attempt to get consumers to directly interact with and buy products through brands’ Snapchat stories and pages.
All in all, management is making all the right moves today to ensure long-term growth for the company.
Given Snap’s attractive long-term growth profile, SNAP stock is undervalued today.
I broadly think that, thanks to international expansion and product enhancements, Snap can continue to add roughly 15 million new daily active users over the next several years. Alongside that steady user growth, ARPU rates should rise significantly as Snap’s ad product improves, more advertisers rush into the ecosystem and new e-commerce and app-integration initiatives gain traction.
On the back of steady user growth and big ARPU growth, revenues should power higher. By about 20%-plus into 2025, and 10%-plus in 2030.
The profitability profile should continue to improve dramatically with scale, since the digital ad business is a highly scalable and high-margin one.
My modeling suggests that Snap is on track to report around $3 in earnings per share by 2030, on revenues of more than $15 billion.
Bottom Line on SNAP Stock
Snap’s earnings report wasn’t perfect. The company did miss on user growth expectations. Management did call for a growth slowdown in August and September.
But, considering we are in the midst of a pandemic that has significantly slowed the global economy and killed ad spending trends, Snap’s Q2 print with 17% revenue growth and stable margins is very, very impressive.
More importantly, it underscores that management is doing everything right to ensure that Snap sustains 20%-plus revenue growth and huge margin expansion for a lot longer.
Accordingly, the selloff in SNAP stock is nothing to worry about. Rather, it’s an opportunity to buy the dip in a long-term winner.
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 and FB.