Social media platform Snap (NYSE:SNAP) has been one of the hottest stocks on Wall Street in 2020. Year-to-date, SNAP stock has surged more than 190% to record highs, as the Covid-19 pandemic has thrust consumer engagement — and by extension, ad dollars — onto the Snap platform at unprecedented rates.
On the heels of such a huge Covid-19 inspired rally and ahead of what will likely be an unwinding of the Covid-19 crisis in 2021 with the widespread distribution of a few highly effective vaccines, SNAP stock ostensibly looks like a stock that has already had its day in the sun, and is due for a rough few quarters ahead.
But that won’t happen.
And it won’t happen for three big reasons:
- The Covid-19 inspired acceleration in digital advertising is not ephemeral. It’s permanent. In 2021, the digital ad market will boom even more than it did in 2020, as general economic activity rebounds.
- Snap is the most innovative social media platform in the burgeoning digital ad space. This robust innovation has set the stage for Snap to sustain significant user and revenue growth over the next several years.
- Snap is also a hyperscalable business with tons of room to grow profit margins in the 2020s. Profit margin expansion on top of significant revenue growth will spark enormous profit growth. Relative to this enormous profit growth potential, SNAP stock is still relatively undervalued today.
Here’s a deeper look.
A Permanent Acceleration in Digital Advertising
The 2020 acceleration in digital advertising on the back of the Covid-19 pandemic is not temporary. It is permanent. It represents an acceleration towards a “digi-everything” future wherein services and products increasingly become virtualized.
Throughout the 2020s, platforms like Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG), Pinterest (NYSE:PINS) and Snap will become more omnipresent than ever. They will increasingly steal mind- and time-share from legacy, physical entertainment and information mediums, like newspapers, magazines and linear TV.
This is a shift that was here long before Covid-19 ever showed up, and which will stick around long after the pandemic leaves. All Covid-19 did was accelerate the transition for a year.
Ad dollars chase eyeballs. Thus, as eyeballs continue to migrate into the digital channel over the next several years, ad dollars will continue to chase those eyeballs into the digital channel, as well. This sets the stage for the global digital ad market to sustain healthy, 10%-plus growth over the next several years.
This rising tide in the digital ad market will lift all boats, SNAP stock included.
Snap Is the Most Innovative Social Media Company
In the burgeoning digital ad market, Snap has distinguished itself as the most innovative company.
On the consumer side, Snap has leaned heavily into original content, augmented reality and cross-app integration to turn Snap from a photo-sharing app, into an all-in-one visual entertainment hub for young consumers. Most recently, the company has integrated a thoughtful adaptation of TikTok into its platform through Spotlight.
The result of this relentless app innovation is a Snap ecosystem that is never boring and always growing its value prop and use cases. Of course, the result of that is surging engagement.
Snap Shows watch time increased 50% last quarter. The company’s recent original series “VS The World” racked up 14 million viewers. A new “Anime Style” AR lens was engaged with 3 billion times in the first week of launch. Headspace Mini was used by 5 million users in its first month after launch.
Most of these initiatives are still in their early stages. As they develop and mature over the next few years, Snap’s user growth trajectory will remain robust, and more and more users will spend more and more time on the app than ever before.
Meanwhile, on the advertising side, Snap has been equally innovative. The company recently launched AR-powered virtual try-on experiences for retailers, and rolled out a new ad mechanism called Bursts which allows advertisers to rapidly reach their target audience. Snap has also deployed a new business-to-business marketing campaign dubbed “Meet the Snapchat Generation” which highlights the platform’s unique demographic.
These ad product improvements are clearly working. Revenue growth just hit a two year high. More importantly, these ad product improvements — much like the consumer product improvements — are mostly still in their early stages, which means that there is significant visibility to Snap sustaining robust revenue growth on top of robust user growth over the next few years.
Big picture: This is a very, very innovative company, which has set the stage for itself to sustain big growth for a lot longer in the burgeoning digital ad market.
The Snap Stock Price Is Not Too High
Like all other digital advertisers, Snap runs on a hyperscalable business model with very high gross margins. Thus, at scale, Snap has visibility to achieving the ~35% operating margins that Facebook has standardized in the digital ad industry.
Today, operating margins are barely above the flatline.
Thus, Snap has a big runway ahead to scale operating margins from ~0% to ~35%. This huge profit margin expansion will couple with equally huge revenue growth to spark what will be enormous profit growth over the next several years.
Relative to this enormous profit growth potential, SNAP is still trading around undervalued levels today.
Bottom Line on Snap Inc
Digital ad stocks are long-term winners. In that long-term winning group, SNAP is one of the more attractive options, given its track record of relentless product innovations and long runway ahead for both revenue growth and margin expansion.
Net net, the big 2020 rally in SNAP stock won’t end when the clock strikes midnight on Dec. 31. Instead, it will spill into an equally big rally in 2021.
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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