Photo-sharing app operator Snap (NYSE:SNAP) has been a great turnaround story during the pandemic. The past year brought a record number of daily active users on its Snapchat app for social connection and entertainment.
Due to this momentum, Snap has been one of the strongest social media stocks this year. Its shares gained more than 300% since March 2020, as investors came to believe in the company’s plan to continue to grow its ads business.
What drove investors back to this once doomed name was proof that the company’s app redesign has started to pay off, increasing the amount of time users spent watching premium content on Snapchat.
The California-based Snap tactfully channelled this increased traffic to ramp up its appeal for advertisers by investing in augmented reality, new advertiser tools and supporting high-quality creators.
In this direction, Snap launched Spotlight in November, a tool to promote popular videos by paying up to $1 million a day to creators of the top-performing posts. The result was that Spotlight users surged to 125 million by the end of first quarter.
These steps pushed sales higher by 66% to $770 million in the period ended Mar. 31, and active users by 22% to 280 million. During the last earnings call, Snap Chief Executive Officer Evan Spiegel said more people made new friends, used the app’s mapping tool and posted stories, which are ephemeral videos and photos, as the economy started to open up in the first months of the year.
A Buying Opportunity?
Even after the powerful rally of the past year, some analysts still believe that there is more upside in Snap shares and the stock’s recent weakness from its record high is a buying opportunity.
In a recent note, Barclays raised its price target on Snap to $75 from $66, saying user trends appear to be accelerating alongside the reopening of the economy, and that the company is “still in the sweet spot of generating fairly significant revenue growth rates.”
Analysts at Morgan Stanley, which has a $75 price target on the stock, believe the Street is under-appreciating the core momentum and the monetization runway ahead.
According to consensus estimates published on Investing.com, the majority of analysts have a buy rating on the stock, with the 12-month consensus price target showing about 28% upside from its current level. Snap closed Thursday at $60.50, down 3.15% on the day.
These bullish projections show that analysts believe in the company’s strategy to fuel growth by deploying its augmented reality tools and expanding in international markets.
The social-media company forecasts that it could generate revenue growth of 50% or more for several years, as advertisers increasingly seek to tap Snap’s augmented reality tools, which let users try on products virtually. On the global front, the company is adding more local content, investing in regional marketing campaigns and offering more language support to products.
Bottom Line
Snap has produced a powerful turnaround during the pandemic by deploying new tools and focusing on the right segment of the market. This momentum is likely to continue in the post-pandemic economic environment, making this social media name a good candidate to buy and hold.