Snap Inc: Why This $16 Tech Stock Could See Further Upside

This Tech Stock Is Making a Comeback

Today’s chart highlights a tech stock that investors loved to hate: Snap Inc (NYSE:SNAP).

Known for its image messaging and multimedia mobile app “Snapchat,” Snap Inc is a technology and camera company based in Santa Monica, California. The company completed its initial public offering (IPO) on the New York Stock Exchange on March 2, 2017, raising $3.4 billion in the process.

The popularity of the Snapchat app meant that a lot of people were watching this tech stock IPO, but Snap Inc’s share price performance wasn’t exactly stellar. Consider this: SNAP stock’s IPO price was $17.00 per share; by the end of 2018, the company was trading at $5.51 per share. That’s a drop of more than 67%.

Investors love tech IPOs, particularly those of social media companies because these stocks have the potential to shoot through the roof. Just take a look at Facebook, Inc.’s (NASDAQ:FB) stock price history and you’ll see what I mean.

SNAP stock’s performance, on the other hand, has frankly been quite disappointing.

Still, investors who unloaded SNAP stock at the end of last year are kicking themselves now. This is because, after bottoming out in December 2018, the company’s shares have been making a strong comeback.

Based on what the company has been doing lately, investors of SNAP stock might be further rewarded.

Let me explain.

A Growing User Base

One thing that every social media company needs in order to appeal to investors is a growing user base.

You see, in this day and age, it’s okay if a mobile app business is not making money yet, but it’s not okay if the user base is limited. The reasoning is that, if you get a large enough user base, chances are you will find some way to monetize it down the road. But if your user base is limited, the monetizing opportunities will be limited too.

That’s why, nowadays, whenever a social media company reports earnings, investors care just as much about the number of its active users as its revenues and profits.

The good news is, despite not being a hot stock for the most part after its IPO, Snap Inc has managed to expand its user base.

According to the company’s most recent earnings report, the disappearing-message app had 203 million daily active users in the second quarter of 2019. That’s 13 million more than what it had in the first quarter and 15 million more than what it had a year ago. (Source: “Snap Inc. Announces Second Quarter 2019 Financial Results,” Snap Inc, July 23, 2019.)

Notably, the number of daily active users of Snapchat grew year-over-year and sequentially in each of its operating regions: North America, Europe, and Rest of World. On average, more than 3.5 billion “Snaps” were created every day during the quarter.

Improving Monetization

Of course, even though the user-base size is one of the most-watched statistics in the social media business, eventually investors want to see monetization.

And in the past, one of the concerns surrounding Snapchat stock was that advertisers might find the app difficult to use. But if you take a look at the latest numbers, you’d see that the company has substantially improved its monetization.

In the second quarter of 2019, Snap Inc generated $388.0 million in revenue, representing an impressive 48% increase year-over-year. Its average revenue per user—another key performance metric for Internet businesses—was $1.91 in the second quarter, marking a 37% improvement from the year-ago period.

Narrowing Losses

Last but certainly not least, Snap’s losses have narrowed. I know, we live in an era in which, when it comes to tech stocks, the market seems to focus more on top-line growth than the bottom-line number.

Keep in mind, however, that at some point down the road, a company is expected to turn a profit. Think about it: who would want to be a long-term shareholder of a company that will forever be unprofitable?

On that front, Snapchat stock investors were glad to know that the company has gotten closer to turning a profit. Excluding special items, Snap Inc’s adjusted net loss came in at $0.06 per share in the second quarter of 2019.

The amount not only represented a huge improvement from the company’s $0.14-per-share adjusted net loss from a year ago but also easily beat Wall Street’s expectation of a $0.10 loss per share.

It’s worth noting that, for the second quarter of 2019, Snap Inc reported a gross margin of 46%, a vast increase from its 30% gross margin reported for the second quarter of 2018.

Snap Inc (NYSE:SNAP) Stock Chart

Looking at the chart below, we see that SNAP stock has skyrocketed $186% year-to-date, making it one of the best-performing tech stocks of 2019 so far.

Chart courtesy of StockCharts.com

Analyst Take

Snap Inc’s business seems to be on the right track. For the third quarter, management expects Snapchat’s daily active users to further increase to 205 to 207 million, which would translate to year-over-year growth of 10% to 11%. (Source: “Snap Inc. (SNAP) CEO Evan Spiegel on Q2 2019 Results – Earnings Call Transcript,” Seeking Alpha, July 23, 2019.)

At the same time, Snap Inc is projected to generate $410.0 to $435.0 million in revenue for the third quarter, which would mark a substantial increase from the $298.0 million it earned in the same period last year.

If the company manages to achieve those guidance numbers, it could give investors a good reason to keep liking SNAP stock.