Snap Inc (NYSE:SNAP) started the year on a poor note when the novel coronavirus pandemic slowed revenue growth. But it’s bound for a strong recovery fueled by an increase in app usage and greater ad revenue. Although SNAP stock was a risky investment for much of this year, the recent momentum will do wonders for its share price.
Snapchat’s performance relative to its industry peers is impressive, despite the lackluster numbers. Revenue growth in the second quarter was much lower than Q1, but the company’s ad revenue is gaining momentum. This hints at more optimistic results in Q3.
Ad Revenue Bumps Snap Stock
Major social platforms saw their ad revenue tumble in the wake of the pandemic. While Snapchat was one among them, the company has since made a strong recovery. During Ad Week, the company stated that advertisers will have the opportunity to buy the first ad that appears on the platform. This will amplify its ad rebound in the days leading to Q3 earnings.
Snapchat holds two key advantages when it comes to ads. First, ads on the platform lean more towards direct response. This encourages customers to take immediate action like downloading an app or buying a product. It differs from brand advertising, which is geared towards long-term customer loyalty. Economic conditions do not impact immediate conversion ads.
Second, unlike platforms such as Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB), ads on Snapchat are not tied to politics. Given that there is little-to-no political commentary or news, there is a low chance that any ads would run alongside this. According to The Wall Street Journal, this could lead advertisers to move their business from Facebook or Instagram to Snapchat.
In addition to these competitive advantages, brands have taken interest in Snap’s new Dynamic Product Ads (DPAs). These ads enable advertisers to upload their product catalog on to the platform. This is then synchronized with the app and shown to relevant users. Any changes to the products are updated in real-time.
This new feature will be a game-changer for Snap as retailers step up their advertising efforts during the holiday season.
Gen Z Loves Snapchat
With Instagram and Tik Tok taking over everyone’s lives this year, it seemed as though Snap was losing its key demographic: teens and tweens. However, a survey conducted by Piper Sandler proves otherwise. The research firm asked 9,800 teens about their favorite brands. 34% of the respondents rated Snapchat as their favorite social platform over Instagram and Tik Tok.
There are a couple of reasons why Snap is trending well among Gen Z. “Snap Originals” is short-form video content that can be found on the platform’s Discovery tab. This feature is doing well among a younger audience and has viewers in the double-digits.
Each video is no longer than 5 minutes and is a telling sign of the type of content younger audiences prefer. Short content that can hold the attention of the viewer is a major reason why this Snapchat is popular among teens.
Another reason lies in the inherent functionality of the platform. Facebook has traditionally trended well with an older audience for its vertical feeds. That is, it serves as a great platform to consume content.
On the other hand, Snapchat is designed to create content while also consuming it. This form of self-expression has made it a favorite among Gen Z. Moreover, the vanishing messages have decreased privacy and security concerns on the app.
The Bottom Line On SNAP
With a major digital rebound underway, SNAP stock is expected to put up some strong results in its third-quarter. Analysts predict Snapchat revenue will rise by approximately 20% from last year fueled by digital ads. As brands increase ad spending in the next few months, Snapchat can close out the year on a strong note.
The company is currently trending at 6.5 times its sales value, which is higher than its social media peers. It also helps that the platform’s key demographic is young and will continue to grow in the years ahead. Any short-term selloff should not cause concern for investors. Broadly speaking, the company has outshined its peers this year and will keep the momentum going.
Place your bets on SNAP stock now before the company soars to new highs post-earnings.
On the date of publication, Divya Premkumar did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Divya Premkumar has a finance degree from the University of Houston, Texas. She is a financial writer and analyst who has written stories on various financial topics from investing to personal finance. Divya has been writing for InvestorPlace since 2020.