Are shares of Snapchat parent company Snap (SNAP 29.37%) cheap? On the one hand, the social media specialist's stock has been volatile this year, and its share price fell below its IPO level. Once equities recover, Snap could be a great pick to ride out the next bull market. On the other hand, Snap still faces a series of challenges that will continue to put obstacles in its path.
There is a lot going on with this tech company, and the bulls and the bears will have arguments that support their views. Let's look at one argument from each side to help figure out whether Snap's upside outweighs the risks.
Green flag: Snap's new growth plans
On Sept. 6, Snap CEO Evan Spiegel sent a memo to his staff regarding the company's new business priorities. This memo was leaked to the public, and it revealed a series of goals the company set and will look to achieve in the next 16 months. Wall Street very much approved: Snap's stock jumped on the heels of the leak of this internal memo.
And with good reason. Some of the goals management is pursuing could make the company much stronger. One of the most critical objectives Snap will seek to achieve is to grow both its user base and the engagement of its users faster than it has in the past couple of quarters. Spiegel set a goal of 450 million daily active users (DAUs) by the fourth quarter of 2023.
For reference, the company ended the second quarter with 347 DAUs.Adding more than 100 million users by the end of next year won't be easy. Snap's DAUs as of the end of 2020 were 265 million. The tech company plans on hitting that mark by ramping up market development efforts in some of its largest markets outside the U.S.
More users and engagement would lead to more opportunities to monetize Snap's customer base, potentially allowing the company to boost top-line growth. Snap plans to record $6 billion in revenue and $1.5 billion in adjusted earnings before interests, taxes, depreciation, and amortization (EBITDA) next year, along with $1 billion in free cash flow.
That would be a significant improvement over the company's current metrics.
SNAP Revenue (TTM) data by YCharts.
Of course, there is no guarantee that Snap will reach all these goals. But Spiegel's memo reiterated the company's change from "growth at all costs" to a company looking to achieve consistency and profitability in what will prove to be a more challenging macroeconomic environment characterized by higher interest rates.
In my view, that change in strategy is a great move.
Red flag: Intense competition
Snap thrives by retaining the attention of its users, particularly those within younger generations such as Gen Z. The problem is many platforms are now fighting for supremacy in this industry. And some have far more users than Snap and are attractive options for advertisers.
Consider the recent meteoric rise of TikTok. The app had about 1.2 billion monthly active users (MAUs) as of the fourth quarter 2021, and that number is expected to reach 1.8 billion by the end of this year (although about 600 million of its DAUs reside in China). Moreover, its user base substantially overlaps with that of Snap -- both are highly popular among those between the ages of 13 to 34.
TikTok is undoubtedly taking up some of the glory that would otherwise be going to Snap. And it's not the only app doing so. Meta Platform's portfolio of websites and apps boasts one of the largest ecosystems in the social media space. It includes Instagram, which famously rolled out its own version of Snapchat's stories with great success.
Snap's competition and the economic headwinds that have caused businesses to reduce ad spending partly explain why the tech company's revenue growth rate recently plummeted.
SNAP Revenue (Quarterly YoY Growth) data by YCharts.
While the economic challenges will eventually subside, the competition in the social media industry will only intensify. It could continue to eat into Snap's revenue growth and disrupt its plan to strengthen its business.
Is Snap stock a buy?
Snap has already built a solid brand name and arguably benefits from a network effect. That is, the value of its platform increases as more people use it. Growing DAUs and more engagement among these users make Snap's platform more attractive to advertisers, particularly those targeting younger audiences.
These competitive advantages can help Snap remain a notable name in the tough social media landscape, and the company's recently announced growth plans could further strengthen its moat. Moreover, Snap is a leader in augmented reality, an opportunity it has yet to monetize fully. The company plans to make a stronger push down that road that could improve its overall business.
Within a year, we'll know more about Snap's prospects. But although the company has encountered severe headwinds recently (who hasn't?), my feeling is that the company's shares are worth buying at current levels. Snap has made tremendous progress since its IPO, particularly in terms of DAUs and revenue.
The company's ongoing expense-reducing efforts will help the bottom line, and its growing ecosystem will allow it to continue attracting advertisers. That's why acquiring Snap's shares at levels below its IPO price looks like a great deal.
