Snap Can Rally Further as Growth Soars in Emerging Markets

The last 12 months have been high on volatility for Snap (NYSE:SNAP). Last September, SNAP stock traded at a high of $83.34. Without doubt, the forward price-to-earnings ratio looked stretched.

Snapchat (SNAP) logo on phone screen in jean pocket

Source: dennizn / Shutterstock.com

With corrections in the overall market and technology stocks, SNAP touched a low of $24.32 in the beginning of February. The wild swing took the stock from overbought to oversold levels.

Amidst depressed sentiments, the company’s fourth-quarter 2021 results served as a positive catalyst. The short squeeze accelerated the upside, and SNAP stock currently trades at $36. That implies a 48% upside from lows.

I believe Snap is positioned for a further rally in the coming quarters. It’s worth noting SNAP stock still trades at a forward price-to-earnings (P/E) ratio of 68.7x. However, that’s not unusual for a high-growth company.

Recently, Benchmark initiated coverage on the stock with a price target of $50. That would imply an upside potential of 38% from current levels. I see this as a realistic target for 2022.

Strong Growth Metrics

If we look at headline numbers for 2021, there are three main positives. Snap reported healthy revenue growth of 64% to $4.1 billion. The adjusted EBITDA growth was impressive at 1,270% on a year-over-year (YOY) basis to $617 million. It was also the first full year of positive operating and free cash flows.

However, looking into the finer details, there are other long-term catalysts. For Q4 2021, Snap reported average daily active users (DAUs) of 319 million. On a YOY basis, DAUs increased by 20%.

However, user growth in North America and Europe was 6% and 11% respectively. It’s the rest of the world that boosted user growth with a YOY increase of 40%.

The trend is similar to that of Pinterest (NYSE:PINS). The company has also been accelerating user growth outside these markets. With regions such as Latin America and Southeast Asia providing a big addressable market, DAU growth is likely to remain robust for Snap.

Another point that’s worth noting is Snap reported a global average revenue per user (ARPU) of $4.06. However, the ARPU for North America was robust at $9.58 and increased by 33% on a YOY basis. On the other hand, the ARPU from the rest of the world was $1.12.

There are two points to note. First and foremost, even as DAUs remain sluggish for North America, the ARPU growth has boosted margins. If the positive trend sustains, free cash flow (FCF) will accelerate further in 2022.

Furthermore, the ARPU in the rest of the world has significant upside scope. I don’t expect it to be anywhere near the levels in North America. However, even if it doubles, there will be a significant impact on Snap’s EBITDA margin and cash flows.

Strong Financial Flexibility

As of December 2021, Snap reported cash and equivalents of $3.7 billion. For the last year, the company also reported free cash flow of $223 million.

Given the factors discussed, FCF will swell in the coming years. Additionally, the company’s adjusted cost as a percent of revenue has also declined. This further supports cash flow upside. The key point is Snap has ample financial resources to invest in product development, sales and marketing.

Last year, Snap partnered with Sony Music Entertainment, part of the Sony Group (NYSE:SONY) conglomerate. This expanded the company’s library of songs for use in sounds and lenses on the app.

The company also partnered with Comcast’s (NASDAQ:CMCSA) NBCUniversal, which allows Snap users to add audio clips from popular TV shows and movies. An expanded product and partner ecosystem will allow Snap to increase DAUs and user engagement.

With these factors in consideration, SNAP stock looks attractive. I expect the reversal rally to sustain. The company has already guided for decent numbers for Q1 2022. If growth from emerging markets remains robust, there is clear visibility for DAU acceleration.

Snap is could also be among the winners in the metaverse space in the next few years. I would expect it and Roblox (NYSE:RBLX) to benefit from related tailwinds.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


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