Snapchat’s parent company, Snap (SNAP), has largely benefitted from the pandemic. Like other stay-at-home stocks, Snap has seen its share price surge since the pandemic began. This has become a hot stock for investors looking for tech-heavy growth plays amid a broader economic slowdown.
However, recent headwinds pertaining to rising interest rates and the potential for a more hawkish monetary policy moving forward have dimmed the outlook for these stocks. SNAP stock has continued toward the $30 level at the time of writing, losing more than 60% of its value from its peak last year.
Questions around whether the macro headwinds will truly affect the long-term outlook of this stock remain. While I’m bullish on this stock in the long-term, over the short-term, it’s entirely possible for this stock to go lower. This environment is not very friendly to growth investors right now.
That said, for those looking for a growth stock to put on their watch list, there are reasons why Snap is an intriguing pick. Let’s dive into a few reasons why this stock may be a great portfolio addition on dips, moving forward.
Snap Boasts Impressive User Engagement
Snap markets itself as a camera company. Its main offering is a mobile-based application known as Snapchat. This platform enables its registered users to communicate via text, videos, and photos. Additionally, the app offers an extensive range of tools to allow users to send customized messages.
For individuals, it is almost impossible to ignore Snapchat’s user engagement. Currently, this digital platform has more than 300 million daily active users, who, on average, open the mobile-based application 30 times every day. Moreover, users have been reported to spend half an hour, on average, engaging with the content that’s available on Snapchat.
This provides Snap with an opportunity to further monetize its digital advertising.
Indeed, this is the key factor most growth investors associate with Snap right now. Like Meta (FB), Snapchat is currently in a stage of development where its monetization has been slower to materialize than many investors would like to see. However, by keeping the platform relatively clean, with few ads, Snapchat has been able to grow its market share in a highly-competitive space vying for eyeballs.
Now, as the pandemic winds down, it’s likely that Snapchat could see user engagement growth slow, or even decline, in the near-term. However, those taking the longer view of the monetization per user for this platform, will like the potential of Snapchat right now.
Ample Room for Growth
As per eMarketer, online ad spend in the U.S. is projected to increase to $279 billion within 2024. That said, Snapchat currently accounts for less than 2% of the overall digital ad spending in the country. To improve this, the company’s management team is now implementing a prudent expansion strategy.
This strategy involves expanding the company’s features to include new add-ons, such as Snapchat’s Scan, which enables users to make purchases based on saved images as well as screenshots. Also, Snap has collaborated with other companies, such as Bumble (BMBL), to combine its camera and lenses with different mobile apps. Lastly, Snap recently announced that it would be introducing its first hardware device.
Without a doubt, such strategic moves could provide a boost to this company’s user engagement over time. This, in turn, would make Snapchat a more valuable online platform for digital advertisers.
Time will tell how this all turns out. However, the list of catalysts for SNAP stock certainly provides bulls with a reason to stick with this stock right now.
Snap’s Profit Potential
At the time of writing, Snap trades around 20-times sales, which is actually well down from its 30x plus level just a few months ago. Those bearish on the outlook for growth stocks, particularly given the rising rate environment we’re entering now, will note that such a multiple is high. They’re not wrong.
However, considering Snap’s future profitability potential, there’s a justification argument that can be made for this valuation. We’ve seen how impressively Facebook was able to monetize its user base over time. With a similar playbook, Snapchat could certainly follow suit and grow into its valuation.
As the company continues to grow its earnings via its core business, there’s ample expectation that profitability will follow.
How soon? That’s the question investors are asking right now.
Wall Street’s Take
As per TipRanks’ analyst rating consensus, Snap stock is a Strong Buy. Out of 16 analyst ratings, there are 12 Buy recommendations and 4 Hold recommendations.
The average SNAP price target is $57.31, implying upside of 88.4%. Analyst price targets range from a high of $80 per share to a low of $36 per share.
Bottom Line
Snapchat’s ability to maintain user engagement, further monetize its user base, and gain market share against deep-pocketed competitors remains to be seen. However, for those bullish on the social media space, this is a company to consider.
Of course, Snap is more than just Snapchat. The company has other growth segments that investors need to take into consideration. Accordingly, there are a number of key drivers that long-term investors can point to as reasons to own this stock.
The company’s valuation remains high, and that could be a reason for some near-term selling pressure. However, should this stock approach the $20 level, it’s entirely possible that a whole new wave of investors will step in. SNAP stock is getting cheap, and could get cheaper, and at some point it will be too cheap to ignore.
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