Social media stocks have taken off over the last year, and Snap (SNAP +1.35%) is no exception.
The Snapchat-parent has jumped nearly 300% since the beginning of 2020 as revenue growth has accelerated and the company has taken meaningful steps to profitability. Snap has capitalized on a number of trends, including increased screen time during the pandemic and a backlash against Facebook. Thanks to those tailwinds and an improved suite of advertising products, the company seems to be at a tipping point -- the business is reaching scale.
I took the opportunity of the stock's recent pullback to scoop up a few shares. Here are three reasons why.
Image source: Getty Images.
1. The future is as bright as ever
Snap's revenue jumped 46% last year to $2.5 billion, and the company posted its fastest revenue growth in at least three years in the fourth quarter, with the top line up 62% to $911.3 million. The company also gained significant leverage, with adjusted EBITDA quadrupling in the fourth quarter to $165.6 million.
The momentum has come on the back of a rebuilt Android app, new products for users like Discover and Spotlight, and new ad products such as augmented reality that give brands and users an experience that they can't get with competing social media apps.
Even better, management sees no sign of that momentum slowing down. In its recent investor day conference, Senior Product Director Peter Sellis said the company was in a position to deliver multiple years of 50% revenue growth after improving its advertising platform over the last several years. As Sellis explained, after making those investments the company is now poised to ramp up growth in areas like video, international, and e-commerce, showing the company is at the early stages of what could be a sustained growth phase.
To give a sense of how 50% revenue growth would compound, that would mean revenue more than tripling over the next three years, and growing by ten times over the next six years if the company sustains that growth rate.
2. It's strongest with the youngest consumers
Snapchat's appeal isn't as broad as that of some other social media apps, but that may be a strength -- the company's target audience is Gen Z and millennials, or the generations that are most valuable to advertisers.
Snapchat's daily active users increased 22% last year to 265 million, and in core markets like the U.S. and U.K. the company reaches 90% of 13-24 year-olds and 75% of 13-34 year olds. Additionally, 80% of its audience is above 18.
A recent Piper Sandler survey of 7,000 teens found Snapchat to be the top social media app, with 31% of respondents listing it as their favorite, edging out TikTok at 30%; it also gained share on Instagram, which came in at 24%. That positioning with the youngest generation of consumers gives Snap an advantage over its social media peers, especially if it can hold on to those users as they grow older and its investments in unique features like augmented reality, lenses, and Snap Maps help distinguish it from its competition.
Snapchat may also be the most innovative social media platform, as its Stories format has been copied by essentially every other app. It also helped normalize formats like vertical video as the company focuses on innovating around the camera. That track record of innovation should help it continue to attract teenagers and young adults.
3. The business model is a proven winner
Some of the most successful businesses in the world are based on digital advertising. Facebook and Alphabet, which makes most of his money from Google search and YouTube, are among the most profitable businesses in the world, showing how powerful this business model is. Similarly, social media companies don't generate content. They simply provide platforms that facilitate exchanges and engage users, selling ads alongside user-generated content. At scale these businesses generate huge margins because they deliver significant value for advertisers, allowing them to charge high prices for a business that essentially runs itself once it's established.
Snap seems to be on the verge of such a moment. Key advertising metrics like cost-per-impression and return on investment are trending in the right direction, and should begin to deliver the kind of profitability that larger social media platforms have exhibited. The seasonally strong fourth quarter offers a window into what that might look like, as Snap was able to generate an adjusted EBITDA margin of 18%.
Management has said it would accelerate spending on operating expenses to support the growth of the business, but the experience of its larger peers and its recent performance bode well for its long-term profit potential.
Snap seems to be just hitting its stride with key advertising and user products in place, and its strength with Gen Z should provide a natural tailwind to user growth and engagement. Even after a blowout performance over the last year, Snap stock still has a lot of growth in front of it.
