Shares of Snap (SNAP 2.89%) have soared over 80% since the end of March. Most of those gains came following Snap's first-quarter earnings report in April, which showed revenue advancing by 44% year over year. But management revealed a deceleration in revenue growth starting in March as advertisers pulled back on spending. That deceleration came back to bite Snap in the recent quarter.
The company reported year-over-year revenue growth of 17% for the second quarter. The stock has given back some of its recent gains following this latest report, but the recent dip could be a good buying opportunity.
Snap's basic strategy is centered on attracting a large and engaged user base for Snapchat, and then making that audience available to advertisers to grow revenue. Snap has been rolling out its Dynamic Ads tool for advertisers, and major brands are already seeing returns on their ad spending. Snap has a long way to go to improve its user monetization, but recent results from its Dynamic Ads product leaves the company well positioned when digital ad spending resumes its pre-coronavirus trend. Here are two reasons the stock still looks like a good investment right now.
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1. Dynamic Ads is a hit with brands
Snap continued to see new users join the platform at a good clip. Daily active users increased by 17% year over year to 238 million during the second quarter. That slightly missed management's expectations of 239 million, a minor shortfall in the grand scheme of things.
Over the last three quarters, Snap has experienced its highest year-over-year growth in daily active users since 2017. Advertising spending has slowed during the pandemic, but the consistent double-digit growth in new users is a good indicator that the appeal of Snap's platform is increasing, pointing to a potential reacceleration in revenue growth once advertisers resume their spending.
Snap is far behind Facebook in monetizing its user base, but the underdog has spent the last few years building an advertising platform that can help ad buyers deliver the right pitch to the right user, and therefore drive significant digital sales growth for big brands.
One of the results of these investments is Dynamic Ads, which Snap launched toward the end of 2019. Adidas and Chipotle Mexican Grill are just two brands that are finding value in Dynamic Ads, which automates the process of placing relevant ads in front of Snapchat users. Adidas saw a 52% increase in return on investment within weeks of trying the Dynamic Ads beta test.
Chipotle used Dynamic Ads to launch a new free-delivery promotion on Snapchat. "Their campaign drove over three times the number of attributed purchases compared to their Q1 2020 campaign," Snap's chief business officer, Jeremi Gorman, said during the recent earnings call.
2. Luring in users with new content
In addition to Dynamic Ads, Snap is continuing to introduce new content with the Discover feature in Snapchat to bring in new users and keep them engaged. Users who watched Shows on Discover increased by over 45% year over year last quarter, and Snap added over 180 new channels in Discover. Some of the shows featured on Snapchat were originally created for linear TV, but these shows now have an audience of over 100 million people on the app.
What's more, this content is reaching more than just the younger crowd. Users over the age of 35 who engaged with Discover content increased by over 40% year over year during the last quarter, and over 125 million people have watched news stories on Snapchat this year.
Snap is just getting started with its content plans. It signed several new expanded partnerships with Walt Disney, ESPN, NBC, ViacomCBS, the NBA, and the NFL to keep the content flowing. In June, the company announced a new slate of Snap Originals, including unscripted series and scripted dramas and comedies being released within the next year.
Snap's underlying business momentum is still strong
Snap is well positioned to see its top line growth recover post-pandemic. During the earnings call, CEO Evan Spiegel described how Dynamic Ads should create a virtuous cycle for its advertising business: "As we onboard more advertisers, the increased quality and diversity of our advertising demand means that we have more relevant ads to choose from when deciding which ad to show a particular person at a particular time. This in turn drives more value for advertisers with fewer wasted impressions, while simultaneously reducing the perceived ad load for our community."
Snap has put together a powerful combination of effective advertising tools and content to drive strong revenue growth over the long term. Digital ad spending will be slow in 2020, but over the next five years, more ad spending is expected to shift from traditional media to digital platforms. That's why the 10% dip in the stock price over the past few weeks is a buying opportunity.
