Social media is a popular pastime among young people, so it's no surprise to see that Snap (SNAP 2.09%) ranks among the top 100 stocks on the millennial-friendly Robinhood investing platform. Shares in the video and image-sharing company have more than tripled this year, and they could rise even further as Snap expands internationally and pivots to new business opportunities with its new video sharing feature, Spotlight.
Let's dig a little deeper to find out why Snap is my top Robinhood stock to buy right now.
Digital media is more relevant than ever
The coronavirus pandemic has demonstrated the growing importance of digital entertainment, and Snap's core Snapchat platform (which allows users to share pictures and videos) has benefited from this trend. Third-quarter revenue jumped 52% to $679 million, while daily active users (DAUs) increased by 18% to 249 million.
Snap currently reports an average revenue per user (ARPU) of $2.73, with most of its advertising sales earned in the U.S. market, which boasts an ARPU of $5.49. The company can drive continued revenue growth by boosting international ARPUs -- especially in large populations like India.
Snap has created an India-specific version of its content discovery platform, Discover, and added support for nine different Indian languages on its Android app. These efforts may have helped boost DAUs on the subcontinent by 150% year over year and helped grow Snap's rest-of-world revenue (which excludes North America and Europe) by 35%, to $83 million in the third quarter.
The international segment contributes 12% of Snap's global revenue, compared to 15% in Europe and 73% in North America. While Snap hasn't provided concrete guidance on what it expects in the future, management believes 47%-50% revenue growth is attainable in the fourth quarter because of a potential boost in holiday advertising demand.
Snap Spotlight is a potential growth driver
The success of ByteDance's TikTok app is a proof of concept for video-based social media platforms. According to a study by DataReportal, TikTok boasts 800 million active users globally, making it one of the most widely used social media platforms in the world. Rivals like Snap are keen to replicate some of that success.
Snapchat already shares some similarities with TikTok -- users can share pictures and short videos on the platform. But Snapchat content tends to be less viral than TikTok content, potentially limiting its monetization opportunities. To change this, Snap launched a new feature called Spotlight that will highlight the most entertaining Snaps created by the community. According to The Verge, this new section could encourage creators to post more "meme-like and jokey" content instead of the mundane "day-in-the-life" content the platform is known for.
Spotlight doesn't include ads as of its launch in November, although it will roll out ads in the coming months. The feature could help boost Snap's ARPU over the long term by creating opportunities for video advertising or a commission-based shopping feature --- much like what ByteDance's Douyin (Chinese TikTok) does in its home market.
Justifying that high valuation
With a market cap of $78 billion, Snap's price-to-sales multiple of 35 is significantly higher than the S&P 500 average under 3 -- but that's not abnormal for a growth stock with compelling catalysts for continued expansion. The company is getting closer to profitability, generating an adjusted EBITDA of $56 million in the third quarter -- up from negative $42 million in the prior-year period.
Snap's adjusted EBITDA added back around $192 million in stock-based compensation, so investors should probably rely on generally accepted accounting principles (GAAP) to get a better idea of how the company's bottom line is performing. GAAP net loss in the period narrowed from $227.3 million to $200 million.