- Piper Sandler reiterated its “Overweight” rating on Snap (SNAP) on April 1.
- The investment bank continues to have a love/hate relationship with the stock.
- SNAP is an excellent long-term buy.
In recent weeks, Snap (NYSE:SNAP) stock has been on a tear. It’s up more than 20% over the past month. That’s the good news. The bad news is that it’s down almost 40% over the past 52 weeks.
Nonetheless, the social media platform’s share price got a boost from Piper Sandler on April 1 when Thomas Champion — an analyst with the investment bank — reiterated his “Overweight” rating and $53 target price on SNAP stock.
Moreover, Champion believes he’s found some monthly active user (MAU) data that suggests Snapchat is performing exceptionally well in certain countries outside the U.S.
“Japan (2% penetration), Italy (12%), Brazil (9%), and Mexico (31%) look compelling. We estimate ~500MM+ addressable MAUs ex-India across the top 15 countries by GDP,” Yahoo Finance reported he said in a note to clients.
“We’re now more confident in our DAU forecasts despite being 14% above Street in ’25.”
Of course, a lot can happen between now and then. So, with that in mind, let’s take a closer look at SNAP stock.
SNAP Stock and Snapchat’s Penetration Rate
The company’s February 2022 presentation lays out its penetration rate for 13-to-24-year-olds and 13-to-34-year-olds — defined as MAUs divided by 2020 population estimates — in established markets such as the U.S., UK, Australia, France and the Netherlands. It’s 90% for the former and 75% for the latter.
In turn, it illustrates why it has a global opportunity to grow its business.
In North America, it had 97 million daily active users (DAUs) at the end of fourth quarter of 2021. That’s 24% penetration of the 400 million estimated smartphones in the continent. In Europe, the penetration rate sits at 15%, and 6% everywhere else in the world. Together, that works out to 319 million DAUs out of 3.46 billion smartphones, a 9.2% global penetration rate.
That sure is low. And it’s why Champion is so enthusiastic about the company’s prospects outside the U.S. Despite being a household name in North America, it’s virtually non-existent outside its five established markets.
But I’m not sure you need an analyst to tell you how big Snapchat’s addressable market is. The company’s telling you in its presentation.
The Opportunity for Snap
Further along in the report, Snap discusses the average revenue per user (ARPU) opportunity. And of the statistics on those pages, two stand out.
First, despite the fact Snapchat reaches almost 50% of U.S. smartphones, it accounts for less than 2% of the U.S. digital ad market. As a glass-half-full investor, it’s hard to ignore the revenue potential. Secondly, in 12 major markets — including the U.S. and Canada — it reaches more than 70% of people between 13 and 34. These 12 countries account for over half the world’s annual digital ad spend.
Furthermore, CEO Evan Spiegel recently discussed the future potential for its augmented reality capabilities:
“..In addition to the momentum with augmented reality on Snapchat, we are very excited by the growing demand from businesses who want to bring Snap’s AR capabilities into their own apps and websites…[We] are increasingly able to self-fund our investments in the future, which positions us well to accelerate our vision for computing overlaid on the world through augmented reality….”
However, if you look at page 9 of the company’s Q4 2021 slides, you will see one apparent weakness in its business at the moment. Outside North America and Europe, it’s barely growing ARPU — up 1% year-over-year and 14% sequentially — despite growing DAUs by 41% YOY.
Overall, Snap’s February 2022 presentation emphasized that North America is the revenue growth engine in the near and medium-term until less established markets can grow digital ad spending. And you don’t need an analyst to tell you that.
The Bottom Line on SNAP Stock
Collectively, Piper Sandler’s recent history of covering SNAP stock is a mixed bag.
It initiated coverage in January 2021 at $66. By October 2021, it was up to $85. Then, in February, the analyst lowered its target price from $72 to $53 on concerns about Apple’s (NASDAQ:AAPL) Identifier for Advertisers, the privacy move that’s pummeled Meta Platforms (NASDAQ:FB) stock. All the while keeping his “Overweight” rating.
Five years ago, Snap had a free cash flow (FCF) of -$819 million. In 2021, it was $223 million. That’s a five-year turnaround of more than $1 billion. And it’s got plenty of opportunities to grow its FCF in the coming years.
Of course, if you do your due diligence, as every good investor should, you’ll know that SNAP stock is a buy regardless of what the Piper Sandler analyst or I have to say about the company. Why? Because the writing is on the wall with SNAP stock.
On the date of publication, Will Ashworth did not have (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.
Will Ashworth has written about investments full-time since 2008. Publications, where he’s appeared, include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.