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3 Reasons to Buy Snap Stock On Recent Weakness at $20

SNAP stock is a long-term winner worth buying on near-term weakness

Ever since Snap (NYSE:SNAP) reported what Wall Street viewed as subpar earnings in late July, SNAP stock has been on a steady downtrend, wherein shares have slipped from $25, to $20 and change.

An apple iPhone showing the snapchat application alongside other snapchat logos
Source: Ink Drop / Shutterstock.com

Adding to the weakness in SNAP stock is the emerging reality that Tik Tok — the viral Chinese-owned app which has come under intense regulatory scrutiny — may not be acquired by Microsoft (NASDAQ:MSFT), and therefore, won’t be banned in the U.S. (which would’ve been a huge positive for Snap engagement).

Net net, the news flow surrounding Snap over the past few weeks has not been favorable. The ~20% decline in SNAP stock price reflects this reality.

But, I think this sell-off has now gone too far, and that it’s time to buy the dip in Snapchat stock. For three big reasons:

  1. The fundamentals are strong. Snap’s July earnings report wasn’t bad. It was good. And the long-term growth drivers underlying this company remain robust.
  2. Tik Tok competition fears are overstated. The fact that Tik Tok won’t get banned in the U.S. isn’t a deal breaker for Snap. It really isn’t even bad news. Snap has an entirely differentiated value prop from Tik Tok, and the continued rise of Tik Tok in the U.S. won’t erode that value prop or eat away at engagement.
  3. The valuation is attractive. SNAP stock has fallen too far, too fast. Considering the fundamentals are robust and that Tik Tok competition concerns are overstated, shares are now undervalued. Near-term upside over the next six months is sizable.

Strong Fundamentals

Snap remains supported by strong fundamentals, with healthy long-term growth drivers which should sustain robust growth at this company for the next several years, at least.

Snap is a social media platform that is quite big, at 238 million global daily active users. That platform is growing quickly, with 10%-plus user growth in each of the past four quarters. It’s also a very addicting platform, as on average, Snapchatters opened Snapchat over 30 times every day last quarter. And it has become deeply embedded into the daily lives of young consumers. In the U.S., Snap reaches 90% of 13 to 24 year olds and 75% of 13 to 34 year olds.

This combination of size, growth, engagement and ubiquity among young consumers gives Snap a strong foundation upon which to build a big, differentiated digital ad business targeted at young consumers.

Snap is in the early stages of doing that.

At $1.7 billion in 2019, Snap’s ad business measured just 0.5% of the global digital ad market last year. That’s nothing, especially for a platform like Snap that has nearly 240 million daily active users and growing.

Snap has an incredible opportunity over the next several years to turn that 0.5% share, into 1%, 1.5%, and even 2% share. Doing so in a digital ad market that projects to keep growing at a double-digit pace implies that Snap will sustain 20%-plus revenue growth over the next few years.

Recent earnings confirm that management is executing against this incredible opportunity, even amid a pandemic. In Q2, revenues rose 17% year-over-year, while July revenue growth accelerated to north of 30%.

So long as management keep executing here, Snap will sustain 20%-plus revenue growth, and SNAP stock will be supported by strong fundamentals.

Tik Tok Competition Overstated

There are fears out there that Tik Tok is stealing Snap users and bringing down Snap engagement.

Such fears are overstated.

Tik Tok and Snap have different use cases. Consumers use Tik Tok for quick entertainment. It’s like mobile TV. You scroll through feeds of entertaining, short videos with music snippets until you’ve grown bored of watching these videos.

Meanwhile, consumers use Snap for communication and sharing. It’s the de facto tool for young consumers to send photos and videos to one another, and upload ephemeral content to be shared across their social sphere. It’s just a totally different use case than Tik Tok.

As such, the rise of Tik Tok in the U.S. will not impact Snap’s growth trajectory.

Indeed, it hasn’t.

Tik Tok isn’t brand new. It’s been around for a while. Tik Tok has an estimated 80 million users in the U.S. That’s up from basically zero a few quarters ago.

And yet, despite this huge growth from zero to 80 million, Tik Tok’s emergence has not impacted the Snap growth narrative. Snap has sustained 10%-plus user growth over the past few quarters. The company has sustained 30%-plus revenue growth (with exception to Q2, because of Covid-19, but the company is now back to 30%-plus growth in July). Engagement has only gone up.

In other words, Snap has thrived alongside Tik Tok for several quarters because the two have entirely different use cases.

This will remain true for the foreseeable future. Thus, present weakness in Snapchat stock because Tik Tok probably won’t get banned in the U.S. doesn’t make much sense.

Discounted Valuation

Considering that Snap’s fundamentals remain robust and that Tik Tok competition fears are overstated, then you’re left with a SNAP stock that — on the heels of a recent 20% plunge — looks too cheap for its own good.

I broadly think that, thanks to international expansion and product enhancements, Snap can continue to add roughly 15 million new daily active users per year, 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 into 2030.

The profitability profile should continue to improve dramatically with scale, since the digital ad business is a highly scalable and high-margin one.

All in all, 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.

Based on a 20 times forward earnings multiple and an 8.5% annual discount rate, $3 in 2030 earnings per share implies a 2020 price target for SNAP stock of roughly $29.

That’s nearly 50% above where shares trade today.

Bottom Line on SNAP Stock

The recent sell-off in SNAP stock is not supported in the fundamentals, which remain strong. As such, all it’s done is created a buying opportunity.

Over the next several months, Tik Tok competition fears will ease, Snap will report a few strong quarters which show that the growth narrative is still on fire, and SNAP stock will roar towards $30.

Needless to say, I think now is the time to buy SNAP stock, not sell it.

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 MSFT.


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/3-reasons-to-buy-snap-stock-on-recent-weakness-at-20/.

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