A Recent Shift in Advertising Should Be Good for SNAP Stock

When you think of augmented reality and virtual reality stocks, Snap (NYSE:SNAP) probably isn’t the first name that comes to mind. That may change, however, based on some news that should be good for SNAP stock.

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

Snapchat has always found ways to use filters so users of the Snapchat platform can have some fun with their selfies — using anything from virtual funny eyes to animal ears to cute photo.

Now, advertisers are taking notice. And thanks in part to the novel coronavirus pandemic, some of them are using the Snapchat filter technology to reach out to their customers to advertise and even sample some of products.

Snap’s Dressing Room?

Peter Naylor, Snap’s VP of Americas, discussed the opportunities recently with CNBC. For instance, beauty company Sally Hansen, a subsidiary of Coty (NYSE:COTY), launched a Snapchat lens in August that allowed users to try out different nail colors.

Also, Champs Sports, a subsidiary of Foot Locker (NYSE:FL), used Snapchat filters to allow users to virtually try on sneakers.

Other retailers used augmented reality filters on Snapchat to promote back-to-school campaigns in the third quarter. “We saw back-to-school, the message kind of shift, whether you’re going back to school, or going back to school at home, so they shifted their creative message,” Naylor said.

That’s a new way to advertise on Snap, but it makes sense when you look closer.

First of all, consider the demographic. An estimated 78% of internet users ages 18 to 24 use Snapchat. This includes 69% of all U.S. teenagers.

Additionally, teenagers spend roughly $250 billion per year. Thus, the market is not insignificant despite teens’ lack of earning potential. And advertisers know how important it is to create brand loyalty at an early age. So, it makes sense for advertisers to go to where teenagers hang out and start building that loyalty as soon as possible.

Speaking to CNBC, Naylor said that Snapchat saw “a lot of momentum” for advertisers in the third quarter:

“We’re feeling a lot of momentum, particularly around what I call accountable ads, you know, performance-oriented ads, because advertisers do want to get back and they are getting back into the groove. They have to drive their businesses, and advertising drives their businesses.”

That said, the company is scheduled to release third-quarter results on Oct. 20. In that, Snap can expect 80% gross margins from its advertising business and 30% operating margins. And while Naylor didn’t talk specifics about the third quarter, his comments reasonably set high expectations for SNAP stock and advertising revenue in the company’s third quarter earnings report.

SNAP Stock at a Glance

In the second quarter, Snap recorded revenue of $454.16 million, which was above analysts’ expectations of $438.09 million. Meanwhile, losses of 9 cents per share matched what analysts had anticipated.

The company also reported an operating loss for the quarter of $310.61 million, which was a 2% bigger loss than the same quarter a year ago.

None of those numbers were tremendously surprising. The second quarter represented the worst of the economic downturn caused by Covid-19, keeping advertisers from spending a lot of money.

However, SNAP stock has shown nice gains since then. Snap is up 65.7% so far this year, and by 20.6% just in the last month. Some of that is likely due to the problems that TikTok is facing and questions about whether that platform will be allowed to continue operating in the U.S.

Mini Apps

When Snap reports its third quarter earnings this month, I’m also going to be interested in what it says about its mini apps.

You may remember that I wrote about this Snap venture in June. Chinese tech company Tencent (OTCMKTS:TCEHY) has a stake in SNAP stock, and it also owns WeChat, which is the biggest messaging app in China.

Snap is using the WeChat model to stand out from other U.S. social media platforms, and its minis are part of that effort. A mini is a lightweight web app that is housed inside Snapchat and used to compliment Snapchat’s core attributes. They can be used to let friends to an activity together, such as study or chat.

Collectively, WeChat made $115 billion from mini apps in 2019. Thus, Snap has a big opportunity there. I’m curious about any information Snap’s C-suite can offer about how the company’s burgeoning mini app business has grown.

The Bottom Line on SNAP Stock

While the social media landscape is highly competitive, Snap is managing to rebound from a difficult 2018 and 2019 to turn a corner. Thus, increased ad sales and the growing mini app business will be important for the company as it marches toward profitability.

SNAP stock has a B rating and a “buy” recommendation in my Portfolio Grader right now.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation.


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