As the metaverse develops into what could be a $30 trillion opportunity in the next decade, investors are turning their attention to stocks that could reap the biggest rewards. Snap Inc (SNAP -3.39%), the parent company of social media camera platform Snapchat, has an incredibly unique take on the metaverse that could push it to the front of the pack.
The company released its financial results for the first quarter of 2022 last week, and while it lost momentum on earnings per share, it made strides in its augmented reality (AR) initiatives. Here's why that's more reason to buy the stock.
Image source: Getty Images.
The path to profits
In the fourth quarter of 2021, Snap generated its first-ever quarterly profit on a GAAP basis with $0.01 in earnings per share. It capped a run of positive progress as the company successfully navigated recent privacy changes by smartphone maker Apple, which impacted Snap's ability to target users to sell advertising. It's one of the few times Snap outplayed its key competitor Meta Platforms.
Unfortunately, the company couldn't sustain its momentum on profitability, with earnings dipping back into negative territory in the most recent quarter. Although Snap grew revenue by 38% year over year, the figure fell 18% sequentially. Plus, it invested 60% more in marketing and spent 52% more on employee costs during Q1 2022 compared to Q1 2021, which impacted the bottom line.
But there is some good news in the bigger picture. Analysts expect Snap could generate $0.53 in earnings per share for the whole of 2022, so it may still be on track for a highly profitable year.
Augmented reality is driving engagement
Daily active users (DAUs) are the nectar that social media companies like Snap survive on. When the user base is growing, so does the appetite for advertising spending by businesses who want to reach Snap's audience. Like most social media platforms, the company saw an uptick in active users during the pandemic thanks to lockdowns and work-from-home arrangements.
But user growth has remained elevated even as COVID-19 restrictions have eased.
The reason could be Snap's heavy investments in augmented reality tools, which 250 million Snapchatters used every single day in Q1 2022 -- that represents 75% of the user base. It also drove soaring engagement, with AR usage more than doubling year over year through Snap's Lenses tool.
This could be a gateway to the metaverse, at least the way Snap sees it. While smartphones are the portal of choice to AR experiences now, Snap has developed wearable glasses called Spectacles that are designed to project AR experiences into the wearer's vision to enhance everyday life.
It's the ultimate merger of the physical and virtual world, and in contrast to traditional virtual reality headsets which fully immerse the user, Spectacles could be worn anywhere, leading to far greater adoption.
Wall Street is on board
Analysts don't always get things right, but they're incredibly positive on Snap right now. Not a single one of the 42 analysts covering Snap stock recommends selling, with a consensus overweight rating overall.
Their average price target is $47.06, which represents a potential 59% upside from where Snap trades today. But one Wall Street bank, Credit Suisse, is far more bullish. After Snap's Q1 2022 miss on earnings per share, the bank lowered its price target from $88 to $77, but that's still a whopping 158% higher than where it sits as of this writing.
With a multitrillion-dollar metaverse opportunity on the horizon and a leadership position in augmented reality, that might even be conservative in the long run.
