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Snap's Next Stop: $70?

By Evan Niu, CFA - Dec 30, 2020 at 9:00AM

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Goldman Sachs thinks the Snapchat parent can get there.

Shares of Snapchat parent Snap ( SNAP 1.98% ) have more than tripled this year, as the social media company has seen a surge in engagement during the pandemic while simultaneously making meaningful progress on improving monetization. Despite those impressive gains, one prominent Wall Street analyst thinks the stock can keep climbing higher.

Here's what tech investors need to know.

Screenshots of woman applying lenses to a selfie

Image source: Snap.

Snap has a lot going for it right now

Yesterday, Goldman Sachs reiterated a buy rating on Snap shares and boosted its price target from $47 to $70. Analyst Heath Terry is impressed with the steady stream of product announcements in recent months, as well as strategic partnerships that could help Snap beat consensus estimates for the fourth quarter.

In November, Snap unveiled a new Spotlight feature, which resembles wildly popular TikTok by showcasing a curated selection of short viral videos. Earlier this month, Snap announced a major partnership with Unity ( U -0.07% ) to allow Snap's advertisers to have access to Unity's ad inventory. Unity is the leading game development platform for mobile games and offers tools for developers to monetize games with ad revenue.

Additionally, there is currently a "favorable macro backdrop for online advertising," according to the analyst. All of these catalysts could help Snap accelerate its revenue growth in the fourth quarter.

"Snap's Spotlight product, new ad campaign objectives and bid types, and the Unity partnership, particularly Unity Ads' inclusion into the Snap Audience Network (SAN), have the potential to drive further momentum in engagement growth as well as provide valuable scale to advertisers," Terry wrote in a research note to investors. "In addition, our recent ad checks as well as 3rd party data suggest outperformance relative to the company's initial guidance for 4Q, acceleration we believe is sustainable beyond the current quarter."

Looking ahead

The online advertising market declined near the onset of the pandemic due to the macroeconomic uncertainty related to lockdown restrictions but rebounded quickly as economies and certain sectors started to reopen.

Meanwhile, industry leader Facebook is grappling with antitrust issues, with regulators and numerous state attorneys general suing the company earlier this month and calling for it to divest Instagram and WhatsApp. Facebook has long been considered one of Snap's greatest competitive threats due to its penchant for shamelessly replicating features like the Stories format that Snap pioneered.

Snap's strong performance in 2020 has pushed its market cap up to around $75 billion, well above social media peers like Twitter and Pinterest, both of which have market valuations of approximately $42 billion to $43 billion. A $70 price target would translate into a market cap of roughly $104 billion. Snap's valuation estimate is based on hopes for faster revenue growth, improving profitability, and the potential for social media companies to experience multiple expansion, according to Terry.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
$47.72 (1.98%) $0.93
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$316.83 (3.26%) $9.99
Twitter, Inc. Stock Quote
Twitter, Inc.
$44.64 (6.12%) $2.57
Pinterest Stock Quote
$38.10 (6.31%) $2.26
Unity Software Inc. Stock Quote
Unity Software Inc.
$146.77 (-0.07%) $0.11

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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