Please ensure Javascript is enabled for purposes of website accessibility

1 Growth Stock to Buy and Hold for the Next Decade

By Daniel Sparks – Aug 3, 2021 at 8:35AM

Key Points

  • Despite a tough year-ago comparison, Snap is guiding for more strong growth in Q3.
  • The company's profit margin metrics are moving in the right direction.
  • Facebook demonstrates Snap's profitability potential.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Some stocks are worth their premium valuations. This is one of those stocks.

Even with Snap (SNAP -6.73%) shares recently hitting new highs, the growth stock arguably remains an attractive investment -- particularly for investors willing to hold shares for the long haul.

With nearly a $120 billion market capitalization at the time of this writing, it may be tempting for investors to conclude that the Snapchat parent company's $3.3 billion in trailing 12-month revenue couldn't possibly justify such a frothy valuation. Furthermore, the case against the stock looks even stronger when investors realize that Snap still isn't profitable.

But there are some good reasons this growth story is arguably worth paying up for.

A group of people taking a selfie together.

Image source: Getty Images.

Growth where it counts

The first reason Snap's premium valuation is easily justified is the social network specialist's staggering growth trajectory.

Second-quarter revenue, for instance, grew 116% year over year to $982 million. Yes, this growth rate was aided by an easy year-ago comparison, when revenue rose just 17% year over year as advertisers reduced or even paused ad spend amid an uncertain economic environment and lockdowns. But here's something to mull over: Management guided for third-quarter revenue to grow 58% to 60% despite going up against a tough comparison of 52% revenue growth in the third quarter of 2020.

But it's not just Snap's top-line momentum telling the company's growth story. The social network is also seeing impressive user growth that handily exceeds Facebook's (META -6.79%) and Twitter's (TWTR). Snap's daily active users grew 23% year over year to 293 million in Q2. This was the highest rate the company has achieved in four years. During the same period, Twitter grew its monetizable daily active users 11% year over year, and Facebook grew its daily active users 7% year over year. 

Facebook previews Snap's potential

Despite Snap's impressive growth, some investors might still be afraid to invest in Snap because the company is losing money. But here's a better way to look at it: Snap isn't profitable... yet. In time, however, the tech company will not only likely be profitable but eventually even boast a lucrative net profit margin.

After all, the more revenue Snap is bringing in, the more its profit margins are improving. This suggests that Snap has a scalable business model -- similar to Facebook. Consider that Snap's operating margin on a trailing 12-month-basis has improved from about negative 100% in early 2019 to negative 23% today. Similarly, Snap's annual gross profit margin has improved from negative 12% in 2016 to 54% today.

Given how much Snap's business model resembles Facebook's, it wouldn't be surprising to see the social network eventually command a net profit margin (net income as a percentage of total revenue) in line with the social network giant's. What is Facebook's net profit margin? On a trailing 12-month basis, it's an incredible 37%. Even if Snap only achieved two-thirds of this net profit margin, the company's profitability five to 10 years from now could be very impressive.

So is Snap worth $120 billion? Easily so, in my opinion. Sure, investors should plan for potential unexpected curveballs. Any investment could go astray. In Snap's case, Facebook's Instagram could prove to be tougher competition than expected. In addition, it's always possible that the photo- and video-sharing social networking that is so popular today with young people fizzles out in the future. But with Snap's user growth accelerating recently, and with the company's ad products attracting significant growth in ad spend, these risks seem to be small in relation to the company's potential.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

Stocks Mentioned

Snap Stock Quote
Snap
SNAP
$9.42 (-6.73%) $0.68
Meta Platforms Stock Quote
Meta Platforms
META
$114.12 (-6.79%) $-8.31
Twitter Stock Quote
Twitter
TWTR

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

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.