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Why Snapchat Stock Could Be the Best Growth Pick for 2020

Vince Martin

Snap Inc. (NYSE:SNAP) stock has had an impressive 2019. Snap Inc. stock (or Snapchat stock, as some investors call it) has gained 190% so far this year. That’s the fourth-best performance among 737 large-cap names with market capitalizations over $10 billion.

Why Snapchat Stock Could Be the Growth Pick for 2020

Source: Christopher Penler / Shutterstock.com

But the past five months haven’t been nearly as impressive. Snapchat stock actually has declined 13% from its late July highs. The shares fell sharply after the company’s third-quarter report in October, though they’ve since regained those losses and then some.

The relatively weak performance of Snapchat stock since July, in a bull market, makes SNAP potentially intriguing heading into 2020. With markets making new all-time highs and growth stocks mostly surging again, Snap stock mostly has been left out of the recent rally. And so it might be a prime candidate to play catch-up, assuming the rally continues next year.

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The Case for Snapchat Stock

Five weeks have made a rather large difference in my opinion. Just last month, I worried that SNAP was the wrong choice for the current market.

Growth stocks elsewhere  started to struggle, and SNAP stock price was falling along with many of its growth peers. Shopify (NYSE:SHOP) and Roku (NASDAQ:ROKU), two of 2019’s best growth stocks, had plunged. Newly public stocks like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) traded well below their initial public offering prices. Cannabis names were in the midst of a long slide.

I’ve suggested that the failed WeWork IPO was a key catalyst behind the pressure on the high-flying names. Whatever the cause, the market certainly seemed to have shifted away from valuing growth at almost any price to insisting on the right kind of growth. Snapchat stock, which is hoping only for adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) profitability in 2020, didn’t seem to qualify.

A little over a month later, however, the environment seems different. SHOP and ROKU have rallied, even though the latter name has pulled back. UBER and LYFT have bounced. (Marijuana stocks, however, have been left out.) This certainly seems like more of a “risk-on” market, particularly with progress on the trade deal and on Brexit.

That environment admittedly has boosted Snapchat stock already: the shares have risen about 20% from their post-earnings lows. But if investors stay aggressive in 2020, Snap stock can rise further.


The SNAP Stock Price in 2020

There are three reasons why Snapchat stock can climb further. First, the 20%+ bounce in the last two months or so wasn’t quite what it appeared to have been. SNAP stock fell almost 6% after its third-quarter earnings on Oct. 22, but the report was fine.

Indeed, as I wrote last month, in a different market, the shares probably would have risen. Its Q4 revenue guidance was a bit soft, but, like many growth companies, Snap Inc. clearly provided conservative guidance. Strong user growth and a nice beat relative to average Street estimates were positive for the outlook of Snapchat stock

SNAP stock price has only risen a few percentage points since Oct. 1, so Snapchat stock really hasn’t benefited that much from the recent rally. Since then, Snap has posted a strong earnings report and the NASDAQ Composite has gained about 13%. Neither piece of good news seems to have been reflected in Snapchat stock.

The second reason is that Snap has an intriguing long-term outlook. In fact, I highlighted the bull case on SNAP last month, even while noting my concerns about its near-term outlook.

Snapchat’s user base has resumed growing. It has an enormous opportunity to monetize its users.  Snap’s revenue per user is far lower than that of Twitter (NYSE:TWTR), let alone that of social media kingpin Facebook (NASDAQ:FB). Particularly overseas, Snap can  take a large amount of  market share, which will drive revenue growth and margin improvements.

That positive outlook has resulted in recent upgrades by smaller firms JMP Securities and Loop Capital. And, again, this has been a market in which strong growth stories attract buyers. Snap’s outlook  certainly has the potential to do the same, as it did through the first seven months of 2019.

What Are the Alternatives?

The third reason  is that there are fewer alternatives for growth investors than there might have been even a few weeks ago. This year’s large-cap winners pretty much all trade near their 52-week highs. ROKU is an exception. But Sea Limited (NYSE:SE), Carvana (NYSE:CVNA), Advanced Micro Devices (NASDAQ:AMD), and The Trade Desk (NASDAQ:TTD), among many others, all have rebounded quickly and sharply.

Even more mature growth plays like Adobe (NASDAQ:ADBE) and Salesforce.com (NYSE:CRM) have rallied. There simply are few, if any, growth stocks available at a discount to their past highs. That alone might make SNAP stock attractive to aggressive investors in 2020.

To be sure, SNAP isn’t cheap — and Snapchat stock does have some risks. Its user growth could stall out again, as it did in 2018. Its competition in online advertising is stiff. But its peers aren’t cheap or risk-free, either.

Snapchat stock obviously needs cooperation from the stock market. Investors fleeing for safety are not going to choose SNAP. Any investor considering Snap stock, even below its highs, has to believe that the decade-long bull market will continue into 2020.

But if that bull market does persist, SNAP looks set to outperform. Its outlook can match that of any other growth stock, but at least relative to its past, its valuation stands out.

As of this writing, Vince Martin has no positions in any securities mentioned.

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