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1 Social Media Stock Likely to Thrive in a Reopening Economy

By Daniel Sparks - Updated Jun 22, 2021 at 4:36PM

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Not only are user posts on the platform increasing but revenue is soaring.

Recent research by Morgan Stanley found that social media usage on some platforms has dropped sharply relative to levels at the end of 2020, when more consumers were staying at home. A reopening economy, therefore, may have an inverse relationship on some aspects of user engagement for some social media platforms. But one social media company, in particular, may actually benefit from a reopening economy: Snap (SNAP 5.34%) -- the parent company of photo- and video-sharing app Snapchat.

Sure, Morgan Stanley did say in its report that it believed one of Snapchat's in-app products -- Snapchat Discover -- saw a drop in engagement recently compared to levels in December 2020. But Discover, which helps keep users up-to-date on current events and find content from pop culture, influencers, and more, is just one feature of the Snapchat experience. Peer-to-peer engagement and total advertising revenue on the app, however, are likely both thriving.

A bar chart with an arrow highlighting a growth trend.

Image source: Getty Images.

Improving user engagement

Interestingly, Snap management said in the company's first-quarter earnings call that it saw "inflection points" in story posting, engagement with its Snap Map, and the rate of new friendships as the economy started to reopen in February. "We designed Snapchat to be a useful complement to real-life friendships and are excited about these optimistic trends developing with our audience," said Snap founder and CEO Evan Spiegel in the company's earnings call.

While users may not be engaging as much with content in Snap's Discover tab, increased stories from users will keep advertisers coming back to the platform.

Accelerating revenue growth

Further, though there may be some uncertainty about how a reopening economy will affect engagement across different aspects of the Snapchat experience, investors can expect one thing with near certainty: huge growth in advertising revenue. Snap's first-quarter revenue soared 66% year over year to $770 million, helping the tech company generate positive free cash flow for the first time. And for Q2, management expects even stronger growth. The company guided for revenue to grow 80% to 85% year over year. Snap's incredible top-line momentum represents both broad-based business momentum and a rebound from a period when marketers reduced or even paused ad spend as they dealt with uncertainties related to COVID-19.

A reopening economy is not only leading to an increase in Story postings from Snapchat users, but it is helping the company attract massive investment from advertisers as they try to capitalize on consumers' return to more normalcy. It's fair to say that while there may be some challenges for Snapchat as the economy reopens, it's mostly a greenfield opportunity.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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