3 Reasons Why Snap Stock Looks Poised to Win Over the Next 12 Months

Snap (NYSE:SNAP) stock got a boost in late September after Guggenheim upgraded the stock from Neutral to Buy and lifted its price target to $28. The main reason for the upgrade was the company’s attractive long-term growth potential in the burgeoning software market.

An apple iPhone showing the snapchat application alongside other snapchat logos

Source: Ink Drop / Shutterstock.com

This bullish call will prove prescient.

Over the next 12+ months, SNAP stock will power meaningfully higher for three reasons:

  1. The near-term growth trends of the social media platform are highly favorable.
  2. The long-term fundamentals underlying Snap are as favorable today as they’ve ever been.
  3. SNAP stock remains relatively undervalued and should be able to take out the $30 level by the end of 2021.

As a result, I think investors should buy SNAP stock today and hold it for the next 12 months.

Here’s a deeper look.

Favorable Growth Trends

The near-term growth trends surrounding SNAP stock have become increasingly favorable over the past few months and should only grow more favorable as we head into 2021. Simply consider:

  • For a variety of reasons, there has been a noticeable exodus from the ultra-popular short-video app TikTok over the past few months. As a short-video app itself, Snap’s user base  and engagement should increase amid this exodus. Indeed, Snap’s app download trends have remained strong over the past few months, with a noticeable uptick in September.
  • Snap recently released a new user interface (UI). While it was met with some criticism, this new design will promote greater user interaction with some of Snap’s more value-additive features that were previously “hidden” in the old interface, such as Maps and Discover. Given that these two value-additive and differentiating features are now easily accessible through an always-on bottom bar, I see this update as providing a meaningful uptick to overall user counts and engagement time on Snap.
  • Snap has been aggressively improving the functionality of its ad business, including a global rollout of Dynamic Ads in July.  The product allows brands to automatically create ads in real-time using advanced Snap tools.Further, the company is testing a novel ad feature dubbed Platform Bursts  which allow brands to “burst” high-frequency, high-reach ads. These ad functionality improvements should attract more advertisers and bigger ad budgets, providing an overall boost to the company’s revenue-growth trends.

Meanwhile, the macroeconomic picture is improving, consumer spending is perking up and ad spending is rebounding.

Overall, then, Snap’s near-term growth outlook has improved and should remain highly favorable, creating a solid foundation for an outperformance by SNAP stock over the next 12+ months.

Strong Long-Term Fundamentals

The long-term fundamentals underlying SNAP stock today are about as good as they’ve ever been.

The world is increasingly digitizing, and social-media engagement is soaring. These are non-cyclical trends which will not reverse course anytime soon.  They should boost the number of users and engagement time on Snap by leaps and bounds over the next several years.

Meanwhile, Snap’s international expansion opportunity is huge. About 27% of North American internet users use Snapchat everyday. Only 10% of European internet users use Snapchat everyday and just 2% of internet users everywhere else use Snapchat everyday. This discrepancy indicates that Snap has a huge opportunity to dramatically increase its international user base.

Perhaps more importantly, recent research shows that ad recall rates among the company’s core youth demographic are higher than in any other demographic. That bodes well for Snap’s ad business.

Moreover, Snap’s average revenue per user (ARPU) rate today hovers around $2.  Twitter’s (NYSE:TWTR) ARPU is $6, while the ARPU of Facebook (NASDAQ:FB) is nearing $10. Clearly, then, Snap can greatly improve the monetization of its platform;  it’s  attempting to do so by improving the functionality of its app.

Snap also can tremendously improve its profitability. The digital-ad business is highly profitable, as it usually features 80% gross margins and somewhere north of 30% operating margins. Snap has 50% gross margins today and negative operating margins, mostly because the company is  smaller than other digital advertisers.

Thus, as the company grows over the next few years, its profit margins will meaningfully improve, paving the path for super-charged profit growth.

So the long-term fundamentals of SNAP stock are very attractive.

Potential Price Gains

All things considered, my estimates indicate that SNAP stock will soar past $30 over the next 12 months.

I 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, its ARPU should rise significantly.

That’s because, as Snap’s ads improve, more advertisers will rush into the ecosystem and new e-commerce and app-integration initiatives will gain traction.

On the back of steady user growth and rapid ARPU growth, Snap’s revenues should power higher, climbing by about 20%-plus annually into 2025 and 10%-plus thereafter into 2030.

The company’s profitability should continue to improve dramatically as it grows, since digital-ad businesses have high profit margins and can grow quickly .

All in all, my modeling suggests that Snap is on track to report earnings per share of around $3.10 by 2030 on revenues of more than $15 billion.

Based on a  forward price-earnings multiple of 20 and an 8.5% annual discount rate, $3.10 in 2030 earnings per share results in  a 2021 price target for SNAP stock of roughly $32.

The Bottom Line on SNAP Stock

Thanks to its strong near-term and long-term growth trends, SNAP stock looks poised over the next 12 months to rally above $30.

So buy Snap today, let it power above $30, and then reevaluate the name.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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Article printed from InvestorPlace Media, https://investorplace.com/2020/09/3-reasons-why-snap-stock-looks-like-a-winner-over-the-next-12-months/.

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