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Snap Stock Will Make a Strong Recovery Sooner Than You Think

Chris Lau

Investors in social media stocks are shifting their positions in a way that seemed unlikely just six months ago: They’re buying up Snap Inc (NYSE:SNAP) stock and selling Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) shares.

Snap Stock Will Make a Strong Recovery Sooner Than You Think

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Even as Facebook trades at a substantially better price-to-earnings ratio than Snap stock, SNAP earned some respect from the markets.

In its fourth-quarter earnings report posted last month, Snap reported better user activity numbers. If the chat app is returning to growth, markets must bid its shares higher.

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SNAP Stock: Smaller Losses in Q4

Snap reported Q4 numbers on Feb. 5 that triggered a rally in its shares. Revenue rose to a record $390 million, up 36% from last year. Its loss shrunk to $195 million. Meanwhile, its EBITDA loss was just $50 million, with the sharp improvement suggesting the company will soon swing to a profit. Odds are on the high side that profits will come as early as sometime this year. In addition to the more positive earnings report, Snap released a new version of its Android application to a small percentage of its community.

On the Apple (NASDAQ:AAPL) side, DAU (daily active users) did not grow from last year’s levels, stuck at 186 million; however, iOS DAU numbers did grow, plus average time spent grew.

It’s also important to consider that iOS revenue generation from users is typically higher than that of the Android user base. The combination of higher usage on iOS and a refresh on Android could lead to an even bigger reach for Snap Inc in the U.S. The company reached over 70% of Americans aged 13 to 34 years old with premium mobile video ads on a monthly basis.

Another impressive figure is that 70% of its audience use or view Lenses daily. The 700 million times that Lenses was used on New Year’s Eve is an impressive achievement for Snap. Seasonally, investors might anticipate such activity falling until the next holiday season which is another three quarters away.

Product Innovation

Snap’s Android application update will cut the time it takes to open the app by 20%. Even after strong Lenses usage, Snap expanded its AR platform through Snap Camera. People may use Lenses on their phone to stream or create the video on desktop or laptop computers. The strong uptake of 300,000 Lenses created in 2018 gives the company a fresh source of content. These videos already brought in 35 billion views. Investors should confidently expect this user activity growing in 2019.

Expect Solid Ad Revenue

The days of ad-free videos on Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube are long gone. But this familiarity with ads has allowed Snap to introduce commercials that are six seconds and cannot be skipped. Through its Premium Content Targeting tool, Snap empowers advertisers to easily buy ad space on the app.

Yet another strong number is the Snap Pixel that brought in 600 million purchase events in Q4, more than double from the previous quarter.

Bottom Line on SNAP Stock

Snap’s revenue forecast of $285 million – $310 million, up 24%-34% from last year, should give short-sellers a scare. Short float is 12.7%, but SNAP bears could keep getting squeezed as the company heads toward profitability. Adjusted EBITDA will be as high as a loss of $140 million, compared to a loss of $218 million in Q1/2018.

Another recent bullish perk is that BTIG, which has never ranked SNAP stock with a BUY rating, changed its stance last week. With a 50% success rate on the stock and an average profit of ~22% on the stock, analyst Richard Greenfield believes SNAP is undervalued by 37%. Even at $15 a share, the stock would return to prices not seen since April 2018. To get back to that level, Snap will need to get back users who left for Facebook’s (NASDAQ: FB) Instagram.

In the future, advertisers, who now have a self-service infrastructure on its advertising platform to work in, may continue to allocate more of their budget on Snap over Facebook. As Facebook consolidates its platforms — Facebook, Facebook Messenger, WhatsApp, and Instagram — and tightens down on security/privacy, companies may post more ads on Snap this year.

Ultimately, the short-squeeze on SNAP stock could come to an end after the stock rose from $4.82 at the start of the year to a close at $11 recently. Another strong quarterly report (due in May 2019) would re-establish confidence in Snap’s growth prospects. From there, SNAP stock could trade back at the $13 – $15 level.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

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