Last week was jam-packed with earnings results from the most popular big tech companies, leading to wild price action swings that kept investors guessing. Social media giant Meta Platforms (META -10.56%) sank by 26% the day after reporting, whereas e-commerce powerhouse Amazon caught a 13% gain.
But it was Snap (SNAP 2.89%) that stole the show, at least from a volatility perspective. Its stock fell by 23% in the trading day before reporting its full-year 2021 results, only to rocket higher by 58% once they were revealed to the market. Although the move clearly caught some investors off guard, it was well-deserved given the company's stellar operating performance for the year.
An investment thesis shouldn't be formed from one earnings report, but Snap is trending in the right direction, and it has an innovative take on the metaverse that could generate significant growth in its business. It's even catching the attention of Wall Street. Here's why.
Image source: Getty Images.
Snap's big year
Changes to privacy rules at Apple and Alphabet, which owns the Android mobile operating system, stirred up major concerns in social media circles during 2021. The tech behemoths handed new powers to their users, allowing them to opt out of being tracked through their devices. While this is great news for privacy advocates, social media platforms like SnapChat and Facebook rely on tracking to gather data on their users to sell highly targeted advertising to businesses.
Facebook parent Meta Platforms cited significant struggles with these changes, saying they could cost the company up to $10 billion during 2022. But Snap appears to be navigating the situation far better, telling the market it has recovered quicker than anticipated. It showed in the company's results, with Snap generating 64% revenue growth in 2021, plus revealing its first-ever quarter of positive net income in Q4.
It comes on the back of record-high 319 million daily active users in Q4, a year-over-year increase of 54 million, or 20%. Average revenue per user also rose to $4.06, helping to boost Snap's gross margin by 7 percentage points to 66%. These metrics are a recipe for a very profitable company in the future, if they continue to trend in this direction.
A leader in augmented reality
When social media companies were rising to prominence in the 2010s, few people expected they'd one day morph into hybrid software and hardware makers. Typically, they've built platforms to be delivered to consumers on third-party devices like Apple's iPhone -- hence Apple and Alphabet holding so much influence as discussed above. But that's all changing thanks to the metaverse.
The digital world is widely anticipated as the next generation of our online experience, and companies like Snap have been forced to build new hardware technologies to support their visions of what it could look like. While most developers of the metaverse, like Meta Platforms, are creating an immersive virtual world, Snap has taken a different approach. It sees an opportunity in intertwining digital experiences with the real, physical world, and it has created its Spectacles augmented reality (AR) glasses to facilitate it.
Snap says that by tying our physical and digital existences together, it can foster real human connections that are essential to the wellbeing of users. That's a fresh, if not drastic, approach to safety that has been absent from most social media platforms in recent years, as studies continue to show their mounting negative effects. Snap could win the metaverse race on this angle alone, which would be a lucrative result considering the opportunity might be valued at $800 billion by 2024, according to Bloomberg Intelligence.
Wall Street is growing more bullish
After the market digested Snap's 2021 results, its stock was rewarded with multiple upgrades on Wall Street.
Bank of America's securities division gave Snap stock a buy rating with a $55 price target, implying a potential upside of 41% from here. And Wall Street analyst firm Jefferies Financial Group lifted its price target to $60, so it thinks the stock could move 54% higher.
But Credit Suisse has set the highest mark, seeing potential for $93 in Snap's future, or a 139% return from its current price of $38.91 as of this writing.
These positive ratings are in stark contrast to Snap's key competitor, Meta Platforms, which received a flurry of downgrades from top investment banks after reporting its results. Since Meta is 10 times larger than Snap by market valuation, Snap's win (at least this time) is a testament to its innovation, especially with far fewer resources.
For investors seeking exposure to the metaverse, Snap might be one of the top picks in the sector right now.
