Social networking company Snap's (SNAP 0.68%) recent second-quarter earnings release was followed by many upgraded 12-month price targets for the stock from analysts. One revised target stretched as high as $110, translating to nearly 50% upside from where the stock is trading today. Furthermore, many of the price target hikes were featured alongside buy or outperform ratings.
Here's a closer look at why analysts are so bullish on the growth stock -- and what's behind the most optimistic Snap analyst's $110 price target for the stock.
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Why some analysts think shares will soar
Following Snap's stronger-than-expected second-quarter results, Credit Suisse analyst Stephen Ju increased his price target for the Snapchat parent company's stock from $90 to $110, and he reiterated an outperform rating. He cited improving ad pricing on Snap's platform as a key reason for his bullishness.
Capturing the company's improved advertising pricing, Snap said in its second-quarter update that its effective cost per 1,000 total ad impressions (eCPM) soared 122% year over year.
"Rising eCPM relative to the prior year reflects the rapid rise in overall demand, improved optimization capabilities within our auction, a mix shift toward relatively higher eCPM products, as well as a mix shift toward relatively higher eCPM regions such as North America," said Snap CFO Derek Andersen in the company's second-quarter earnings call.
Snap's trend of rising cost per 1,000 total ad impressions could persist over the next decade, Ju believes. Of course, the catalyst will decelerate from this quarter's triple-digit growth, as the period benefited from an easy year-ago comparison when marketers were holding back some ad spend as businesses navigated uncertain environments.
Other analysts similarly cited sustainable growth trends in advertising revenue growth. But some also praised the company's ability to grow its daily active users.
Impressive business momentum
It's not surprising to see so many analysts growing more optimistic about Snap stock. The company's second quarter was truly exceptional. Revenue soared 116% year over year to $982 million, and the company's daily active users increased 23% year over year to 293 million.
Furthermore, Snap provided very strong guidance. Management said it expects revenue in the third quarter to increase 58% to 60% year over year. This is quite an extraordinary outlook considering it's on top of 52% growth in the year-ago quarter.
Overall, Stephen Ju's bullish view for Snap stock makes sense. While investors should be careful not to give short-term price targets too much weight since many factors outside of a company's control can have an outsized effect on a company's stock price in periods less than several years, Snap shares do look attractive with such strong business momentum in the rearview mirror and a strong outlook from management.
