Investors today have numerous stock discovery tools at their disposal. If you're not sure where to put your money, a simple internet search for "stock ideas" will surface billions of results. Of course, not all of those ideas will be good ones, but it's not a bad place to start your research.
Occasionally, I like to glance at the price targets set by Wall Street analysts. These numbers are short-term in nature, reflecting a stock's expected price action over the next 12 months, so I never make investment decisions based solely on those metrics. But they can be a source of inspiration, and they can help confirm or refute your own investment thesis for a stock. Just remember, a price target only represents one person's opinion.
With that in mind, certain analysts see big gains on the horizon for Coinbase Global (COIN +1.90%) and Snap (SNAP +0.00%). Here's what you should know about these growth stocks.
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Coinbase Global: 185% implied upside
Since Bitcoin's debut in 2009, the cryptocurrency market has surged in value to over $1.8 trillion, and the number of crypto assets has surpassed 7,500. At the same time, new blockchains have been constructed that have greater functionality, allowing them to be used for more than simple process transactions. For instance, Ethereum supports smart contracts and decentralized financial services. In short, this asset class has created a new financial system: the cryptoeconomy.
Coinbase helps clients participate in the cryptoeconomy, providing a range of services to retail investors, financial institutions, and ecosystem partners (e.g. software developers, merchants). Broadly speaking, it breaks its sales into two categories: The first is transaction revenue, comprising fees charged for purchasing or spending cryptocurrencies. The second is subscriptions and services, comprising recurring fees charged primarily for storing, staking, or borrowing cryptocurrencies.
Historically, Coinbase has benefited greatly from volatility in the cryptocurrency market. That's because volatility goes hand-in-hand with frequent trading, and high trading volume means more transaction fees. Case in point: In May 2021, the total market value of all cryptocurrencies fell by roughly 50%. And during the second quarter, Coinbase saw monthly transacting users surge by 487% to 8.8 million.
Moreover, through the first half of 2021, the company generated revenue of $4.0 billion, up 969% compared to the first half of 2020. And earnings per diluted share hit $9.60, up 6,300%. Given those impressive results, DA Davidson's price target of $650 per share (implying 185% upside) may not be as unreasonable as it sounds.
That being said, the cryptocurrency market is still a regulatory nightmare. China's central bank recently declared all cryptocurrency transactions illegal, and U.S. SEC Chairman Gary Gensler has described the cryptocurrency market as "rife with fraud, scams and abuse." Personally, I think Coinbase has a lot to prove, but if you believe crypto assets and decentralized financial services will see mainstream adoption in the future, this stock looks like a good way to play that trend.
Snap: 50% implied upside
Snap is the company behind Snapchat, the popular mobile app that allows people to interact visually with friends, family, brands, and local businesses. Specifically, Snapchat supports text, photo, and video messages; it also offers licensed music, millions of augmented reality lenses, and other creativity tools to help people personalize their interactions.
More recently, Snap added scan functionality to its camera, a tool that identifies objects and surfaces contextually relevant information. For instance, a user can take a picture of a friend's outfit and Snapchat will help them shop for similar styles, and product images can be used to trigger a search on Amazon.
Broadly speaking, these features help drive user engagement, and management's efforts are paying off in a big way. Snap now has 293 million daily active users (DAUs), up 23% year over year, and those DAUs open the app an average of 30 times each day. More impressive, Snapchat's user base includes 75% of the 13- to 34-year-old population in the U.S., a highly prized demographic among advertisers.
Those impressive statistics have helped Snap's ad platform gain traction with brands and marketers, as evidenced by the company's strong top-line growth.
|
Metric |
Q2 2019 |
Q2 2021 |
Compound Annual Growth Rate |
|---|---|---|---|
|
Trailing 12-Month Revenue |
$1.4 billion |
$3.3 billion |
55% |
Source: YCharts.
Despite this strong growth, I see a potential red flag. Snap is currently unprofitable on a GAAP basis, and it's burning through cash. Over the past 12 months, Snap generated negative free cash flow of $128 million. Investors should monitor this metric, as positive free cash flow is a critical component of a sustainable business model.
However, Snap is moving in the right direction. It burned less cash this year than it did in the prior year and, more importantly, the company has an enormous market opportunity. In fact, global digital ad spend is forecast to hit $645 billion in 2024, according to eMarketer. That leaves Snap with plenty of room to grow its business. And from that perspective, Credit Suisse's price target of $110 per share (implying 50% upside) seems entirely plausible.
