When social media firm Snap (NYSE:SNAP) went public two and a half years ago, the initial reaction to the stock was disappointing. Snap stock has rebounded in epic fashion this year, surging more than 156% as of Oct. 11.
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Snap is usually thought of as being the purveyor of the popular Snapchat social media platform, one that puts the company in direct competition with Facebook’s (NASDAQ:FB) Instragram. In addition to Snapchat, the company’s other marquee products are Bitmoji and Spectacles. However, management wants investors to consider Snap stock through a different lens (pun intended).
This how the California-based company describes itself in corporate press releases: “Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate. We contribute to human progress by empowering people to express themselves, live in the moment, learn about the world, and have fun together.”
Investors reconfiguring their view of Snap stock and the drivers of the shares’ performance is a work in progress. As noted above, the typical view of Snap stock is that it’s the company behind Snapchat. That’s not a bad thing. Wall Street is increasingly warm to Snapchat’s operating performance and the platform’s revenue-generating capabilities.
Earlier this month, Morgan Stanley analyst Brian Nowak and his team upgrade Snap stock to “equal-weight” from “underweight,” while boosting their price target on the shares to $17 from $14. That $17 price forecast is just below the Wall Street consensus of about $17.50, but still implies upside of 20% from the Oct. 11 close of $14.16.
“Year-to-date we have underestimated Snap’s stronger top- and bottom-line execution and ability to drive growth,” said the Morgan Stanely analysts in a note to clients.
A Path to Profitability
In the current market environment, investors are displaying little tolerance for companies that are losing money and even less patience for those that cannot clearly articulate when profitability will arrive. Those sentiments are true across multiple industries.
Fortunately for Snap stock, when the company reported second-quarter earnings a few months ago, losses narrowed and the goal of full-year GAAP profitability remains very much in reach. The company will get another chance to highlight its path to profitability on Oct. 22 when it reports third-quarter results. The upcoming earnings update is critical to the near-term fortunes of Snap stock because the company guided higher for this quarter, meaning management must, at a minimum, meet those expectations, if not a beat them.
Advertising dollars are major revenue drivers for Snap and while the company has some compelling content partnerships with the likes of The New York Times, ESPN and Vogue, the fight for digital advertising cash is notoriously intense.
“In terms of Snap’s addressable market, while digital ad budgets continue to grow, so does the number of ad inventory providers in the space, and there is no guarantee that a larger portion of new digital ad dollars will flow to Snap,” said Morningstar in a recent note.
The research firm notes that Snap is competing with the likes of Facebook and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in the digital ad universe and that the competition is difficult for newcomers to encroach on the dominance of those two internet giants.
Bottom Line: Worth The Risk
Even after more than doubling than this year, Snap stock is still worth a look as a small position for tactical investors. The company is still in its early innings of growth and if it can continue growing content partnerships along with user engagement, upside could be considerable.
As Morgan Stanley notes, there’s “room for higher monetization” in North America and management’s execution has been surprisingly impressive this year. Still, waiting on profitability will require some patience for Snap stock investors.
“While Snap’s augmented reality offerings will continue to bring more users onboard in the near-term, we believe the presence of Instagram will continue to pressure no-moat Snap’s user growth in the long-run,” according to Morningstar. “However, we also remain convinced that Snap’s user monetization will strengthen as the firm continues to attract more ad dollars.”
For investors compelled to enter Snap stock at current levels, the $16 area or the $17 target highlighted by Morgan Stanley likely represent fair value unless management surprises with significant upside guidance for the fourth quarter and 2020.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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