SNAP

With Its Stock at an All-Time High, Is Snap a Buy Headed Into 2021?

Snap (NYSE: SNAP) is the parent company that owns the popular smartphone apps Snapchat and Bitmoji. Snap is one of the most creative digital companies out there and its products allow users to communicate with fun camera filters, disappearing messages, and augmented reality.

Snap has seen rapid growth this year in terms of both active users and sales, which has translated into a soaring stock price. In fact, the company has outperformed its social media peers. The question is whether Snap's stock will continue to increase in 2021 after reaching all-time highs in 2020.

SNAP Chart

SNAP data by YCharts

Record financial results

Snap has been posting stellar financial results this year. The third quarter of 2020 was a historic milestone for Snap. Daily active users (DAUs) added 39 million new members, an 18% increase compared to the third quarter of 2019. The average number of snaps created every day is another operating metric that measures the company's performance. This metric saw an increase of 25% in the third quarter of 2020 compared to the third quarter of 2019.

The company was able to translate user engagement into more revenue and higher revenue per user. For the first nine months of 2020, the company experienced a 38% increase in revenue compared to the first nine months of 2019. Furthermore, the company has started reporting positive earnings before interest, taxes, depreciation (EBITDA), which means the company is getting closer to profitability, although it is still a ways off from showing positive net income.

A person using a smart phone with thought bubbles above the phone

Image source: Getty Images.

New in-app features and monetization opportunities

Driving the improvements in user count and monetization has been Snap's relentless focus on innovation. The company has made a ton of improvements recently and plans to make many more feature enhancements in 2021.

Inspiration can go a long way, especially when dealing with the younger generation. Snap has capitalized on this idea and launched new unscripted video series that involves celebrities Kevin Hart and Jaden Smith. The company also released the "VS the World" series featuring mixed martial arts fighter Conor McGregor. The series was a massive hit, reaching over 14 million viewers. These videos help draw in new users and also keeps existing user actively engaged, allowing the company to reach new audiences and better monetize existing audiences with advertising.

Another noteworthy highlight from Snap was its engagement with new companies such as Champs Sports, Kohl's, Levi' Strauss & Co., and Nike's Jordan brand. These brands were able to come up with a feature that allowed Snap's users to virtually try on products such as shoes and clothing. For example, if you create a Bitmoji character, you can dress your avatar with Levi's jeans. This a creative way to make advertising fun.

Digital avatars wearing Levi's clothing

Image source: Snap Inc.

To say Snap made significant progress during 2020 is an understatement. The company was able to launch many new experiences for marketers and users. Snap is quickly proving to be one of the most innovative and creative social media companies around.

Is Snap a buy?

Snap has a ton of momentum behind it. The stock soared in 2020 and its stock outperformed its social media peers. But importantly, the company showed equally strong momentum in the fundamentals of its business. Revenue growth has been impressive and the company is inching toward becoming more profitable as well.

Given the company's strong product innovation with new products, Snap appears to have legs to continue growing. Valuation-wise, the stock isn't cheap. Snap is not yet profitable and trades for over 33 times sales. However, if the company keeps growing at its current rate, it could very well grow into its valuation within a few years and then some.

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Luis Sanchez CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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