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Tesla (NASDAQ: TSLA ) is the most polarizing stock in the world. But a close second is Snap (NYSE: SNAP ).
There are two prevailing theses on SNAP stock out there. The first is the bull thesis, which goes something like this: The company is the innovator in a highly valuable social media space, and also the most popular platform among the all-important youth demographic. Eventually, Snap will turn that innovation and popularity into solid financial results.
The other thesis is the bear thesis. That thesis is predicated on the idea that anything Snapchat can do, Instagram can do better, and with more users. Because network effects are a thing in social media, this puts Snapchat in an exceptionally precarious situation.
Who is right?
Tough to say. Both arguments have merit. But at this point in time, the slightly bullish thesis seems most appropriate.
Here's a deeper look.
The good about Snapchat is that it's still one of the hottest social media platforms in America, especially among younger audiences.
According to a recent Pew survey, Snapchat is the third most widely used social media app among teens in North America (69% mind-share), slightly behind Instagram (72%) and YouTube (85%). Moreover, in that same survey, Snapchat ranked first as the app that teens say they use the most (35% versus only 15% for Instagram).
Meanwhile, Piper Jaffray's Spring 2018 Taking Stock With Teens survey found that Snapchat is by far and away the most popular app among U.S. teens. It ranked first in terms of mind-share at 45%, with Instagram a distance second at 26%. An RBC Capital survey reached a similar conclusion that Snapchat is the most popular app among teenagers.
Overall, Snapchat is still very popular. After all, it was the most downloaded app in 2016 and the second most downloaded in 2017 (first was Bitmoji, which got a big boost thanks to it being integrated with Snapchat). If this popularity persists, it should translate into higher advertising demand and revenue, which could boost SNAP stock.
The bad about Snapchat is that Instagram is kicking its butt.
It is no big secret that Snapchat story volume has dropped considerably over the past several months. Concurrently, Instagram story volume has risen considerably.
Moreover, big and small headlines alike are pro-Instagram, anti-Snapchat. Over the past several months, Instagram has crossed the billion monthly user mark, Instagram Stories has grown to twice the size of Snapchat, IGTV has launched, and Instagram Lite has gone live. Snapchat hasn't really had many positive headlines over the past few months, aside from some small-time partnerships.
The small headlines are also pretty bad for Snapchat. I did a Google News search on "Snapchat" and this is what I found on page 1:
By comparison, I did a Google News search on "Instagram", and this is what I found on page 1:
In other words, the headlines about Snapchat revolve around misuse of the platform via robbery, extortion and sharing of illegal content. The headlines about Instagram presently revolve around exclusive music offerings, trendy poses, important posts, and new users.
SNAP stock trades at nearly 20-times sales. Meanwhile, sales growth is decelerating. User growth is decelerating. The company still isn't profitable. And cash burn is a huge issue.
In other words, you have a richly valued stock with some ugly financials and adverse growth trends.
On top of that, you have a stock that is rebounding like it always has after a post-earnings sell-off. Unfortunately, those rebounds are usually short-circuited by a disappointing earnings report. Thus, the present action in SNAP stock does seem like another pop-and-drop set-up.
Bottom Line on SNAP Stock
The road will be bumpy thanks to Instagram competition.
But if Snapchat maintains its dominance among the youth demographic and continues to improve its advertising solutions, then the company could transform into a go-to digital advertising platform for companies who do not necessarily need max reach, but instead need max engagement among younger consumers. Consequently, Snapchat could become a critical part of any advertising campaign that wants to reach young consumers.
Under this assumption, I think Snap stock is appropriately valued today. I expect the company to do $0.80 in earnings-per-share in five years. A Facebook (NASDAQ: FB ) type forward multiple of 25X on that implies a four-year forward price target of $20. Discounted back by 10% per year, that equates to a present-day value just under $14.
As of this writing, Luke Lango was long TSLA, SNAP and FB.
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