Why Bears Are Underestimating Snap Inc (SNAP) Stock

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Snap’s (NYSE:SNAP) first-quarter results, announced on Wednesday, showed that the company’s performance has improved meaningfully in every important area, and that its appeal to its core user demographic and to advertisers remains very strong.

Snap Inc (SNAP) Stock: The Gains Will Be Ephemeral

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As a result, SNAP stock, whose market cap remains a small fraction of Facebook (NASDAQ:FB) stock’s, should advance much higher over the long term. Moreover, Snap stock should benefit from its continuing status as a prime takeover target.

SNAP Stock Will Be Boosted by Snap’s Growing Appeal to Young People

Many of those who have been bearish on SNAP stock were 100% convinced that users would desert Snapchat in droves because Facebook’s Instagram, using a copycat strategy, had begun offering similar features as Snapchat. But, if anything, young people’s loyalty to Snapchat  has increased.

The company said that, as of March, its ads can reach more American users between the ages of 13 and 34 than Instagram. Moreover, SNAP added 4 million net new users in Q1, although its user base fell by a tiny 1 million users year-over-year.  But much more importantly, the company’s average revenue per user (ARPU) jumped to $2.81 last quarter, up  from $2.10 in the same period a year earlier.

So far from fading into oblivion as most SNAP stock bears predicted, Snap’s strength among its core user base is growing.

SNAP Stock Will Be Boosted by Snap’s Growing Appeal to Advertisers

As the tremendous growth in the company’s ARPU shows, advertisers are starting to be willing to pay more to reach Snap’s users.Also indicative of the company’s growing appeal to advertisers is the 29% YoY jump in its revenue and the $190 million YoY increase in its free cash flow to -$78 million.

Advertisers and users are clearly attracted to Snap’s innovative, successful content, which includes hit original shows and content enhanced by Augmented Reality.  Among the huge companies that have chosen to advertise on Snapchat are Nestle (OTCMKTS:NSRGY),  Nike (NYSE: NKE), Samsung and BMW. According to SNAP, all of those marketers achieved great results by advertising on Snapchat.

As I’ve predicted multiple times in the past, Snap’s appeal to advertisers will likely greatly continue to increase as Snap’s core user base gets older and its users’  income naturally increases. Therefore, Snap’s APRU, revenue, and profits should continue to surge tremendously, lighting a fire under Snap stock in the process.

Why the Bears’ Worries About SNAP Stock Are Overdone

Those who are bearish on Snap stock appear to have conceded that Snapchat is not going to crash and burn anytime soon.

Now they seem to have two main arguments: the valuation of Snap stock is too high and the company’s Q2 top-line growth guidance of 28%-37% is not very impressive. Those two concerns were likely the main reasons that SNAP fell in the wake of Q1 results.

The bears overlook that the market cap of Snap stock is only $14 billion, while the market cap of Facebook excluding its cash is $480 billion. As Snap’s top and bottom lines continue to greatly improve, the market cap of SNAP should move much closer to that of FB.

Moreover, the valuation of Snap stock should be boosted by the fact that, unlike, say FB or NFLX, it remains, due to its relatively low market cap, a viable takeover target for at least several huge tech companies, including Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL).

Finally, worrying about SNAP’s guidance of “only” 28%-37% YoY revenue growth in Q2 is a classic case of focusing on the trees and ignoring the forest. The bottom line on SNAP stock is that its has proven that it’s growing, not fading into oblivion, and that its financial results have greatly improved and will continue to do so going forward.

As of this writing, the author did not own shares of any of the companies mentioned.   

 

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