Snap Inc (SNAP) is the parent company of the popular social media app Snapchat. Snapchat is loved by millions of users, especially younger demographics, for its fun features like filters, lenses, and disappearing messages. However, while Snapchat has found immense popularity among users, Snap as a publicly traded company has had a more turbulent history. Since going public in 2017, Snap’s stock price has seen plenty of volatility. This has led many investors to question if Snap’s stock is worth buying. In this article, we will analyze Snap from multiple angles to determine if it is a good investment today.
Snap’s Business Model and Financials
Snap makes most of its revenue from advertising on Snapchat. This advertising includes Snap Ads in Stories, Sponsored Lenses and Filters, and AR shopping experiences. Snap has been innovating heavily in advertising and steadily growing its revenue over the past several years:
| Year | Revenue |
|---|---|
| 2018 | $1.18 billion |
| 2019 | $1.72 billion |
| 2020 | $2.51 billion |
| 2021 | $4.12 billion |
Snap is also improving on profitability, posting positive net income in 2020 and 2021 after losing money each year from 2017-2019. In Q3 2022, Snap had 363 million daily active users, up 57 million (19%) year-over-year. While revenue growth is slowing in the current macro environment, Snap still grew revenue 6% year-over-year in Q3.
Overall, Snap has made significant progress in monetizing Snapchat through innovative advertising products. And it still has a long runway for growth in global advertising revenue.
Snapchat’s Competitive Position
Snapchat occupies a unique position in the social media landscape. Unlike Facebook, Twitter, or TikTok, Snapchat is oriented around visual communication and cameras. Key Snapchat features like Stories and Lenses foster fun personal interactions rather than passive browsing of a feed. This gives Snapchat a differentiated appeal and high engagement among its younger user base.
Snapchat’s focus on cameras and AR also positions it well for the rise of augmented reality and the “metaverse”. Snap is leading the way in AR development with things like AR shopping and virtual try-on experiences. And Snapchat’s high engagement lends itself to monetization through branded AR experiences.
While TikTok and Instagram’s Reels are competing with Snapchat for short form video, Snapchat still holds a competitive position in its niche as the go-to place for visually enriched messaging and fun AR experiences. And Snapchat’s highly engaged user base gives it opportunities in ecommerce and other emerging areas like web3.
Snap’s Future Potential
Here are some key areas where Snap has potential for future growth:
Further Monetization of Snapchat
Snap is still early in monetizing its active user base through advertising and commerce. It is expanding its advertising products for both small and large businesses. And early experiments in shopping/e-commerce generated strong results, suggesting ample room for growth.
AR and Hardware Efforts
Snap is an AR leader and will likely benefit as AR goes mainstream. Its AR spectacles and camera drone give it hardware pathways too. These long term bets could pay off big time if Snap leads the next computing platform.
New User Demographics
Most Snapchat users are currently under 30. Expanding its appeal to attract and engage older demographics could significantly expand Snap’s addressable market.
International Growth
Over 75% of Snap’s users are still from North America & Europe. Huge growth potential exists in emerging markets across Asia, South America, and the rest of the world.
In summary, Snapchat has carved out a compelling niche in mobile social communication. And Snap still has ample room to further monetize its large, engaged user base through advertising, shopping, content partnerships, and AR. Its future prospects look bright.
Risks and Challenges
Snap does still face a variety of risks and challenges as a company:
– Competition from larger rivals like Facebook/Instagram and ByteDance/TikTok remains fierce. These rivals can copy features and outspend Snap.
– Snap spends heavily on R&D and scaling new products/features. Profitability is still inconsistent quarter to quarter.
– Snap’s stock price remains highly volatile amidst the competitive and macroeconomic uncertainties.
– While Snap’s user growth is strong, growth rates have declined from earlier peaks. And users are fickle – they could leave for the next hot app.
– Snap will need to keep innovating and improving monetization to justify its nearly $20 billion valuation.
Valuation and Expected Returns
With the risks and opportunities in mind, let’s look at Snap’s current valuation and expected return potential:
– Snap currently trades at around $10 per share with a market cap of $16 billion.
– On a price/sales basis, Snap trades at around 4x forward revenue. For a company growing revenue 20-30% annually, this seems relatively inexpensive.
– Wall Street analysts expect Snap to grow revenue by over 20% annually over the next 2 years. If it hits these targets and trades at a comparable valuation, the stock could deliver 50%+ upside in 2-3 years.
– However, Snap’s beta is above 2, indicating extreme volatility. The stock could just as easily fall further or stagnate if growth or profits stumble.
Overall, Snap stock appears reasonably valued today if you believe in Snapchat’s long term growth story. But be prepared for a roller coaster ride typical of high growth, high uncertainty stocks.
Conclusion
In summary:
– Snapchat maintains a uniquely engaging and differentiated experience in mobile social, centered on visual communication.
– Snap has made big strides in monetizing its large user base through innovative advertising products. Significant growth potential remains.
– Snap is an augmented reality leader and early experiments in ecommerce generated promising results. These emerging areas provide optionality.
– Snap does face risks from competition, profit uncertainty, slowing user growth and other macro factors. The stock will likely remain volatile.
– With strong revenue growth and reasonable valuation, Snap stock could potentially double over the next 2-3 years. But it’s a high risk, high reward play typical of digital media stocks.
For investors with the proper time horizon and risk tolerance, Snap may be worth a small position as part of a well diversified portfolio. But it’s ultimately a speculative investment given the competitive and execution uncertainties.