Last week, social media company Snap (NYSE:SNAP) reported strong fourth-quarter numbers which beat the Street’s expectations on all fronts. Users, revenues and profits all topped the analysts’ consensus estimates. In response, SNAP stock popped to fresh all-time highs.
Since then, SNAP stock has retreated on news that the company is filing a mixed shelf registration to offer securities.
This weakness is an opportunity.
Zooming out, Snap’s Q4 earnings report was more than just a collection of just strong numbers. It was further evidence that Snap is the most innovative company in the red-hot social media space.
Innovation is the fuel of growth. Thus, as the most innovative player in a hypergrowth industry, Snap projects to sustain robust growth momentum for a lot longer.
Behind that robust growth momentum, SNAP stock will keep powering higher.
Here’s a deeper look.
Snap’s Strong Earnings
Everything about Snap’s Q4 earnings report was good.
User growth trends were healthy. Indeed, the number of DAUs on the platform actually rose 22% year-over-year, which is better than what the company reported in Q2/3 (~18%) and marks the best DAU growth rate for the platform since the first quarter of 2017. That’s impressive.
Unit revenue growth trends were just as healthy. ARPU rose 33% in the quarter, also up from what the company reported in Q3 (+29%) and the best ARPU growth rate Snap has reported since the second quarter of 2019.
Behind multi-quarter-best usage and unit revenue growth rates, Snap’s revenues rose 62% in the quarter — it’s best mark since the fourth quarter of 2017 and significantly up from pre-Covid revenue growth rates in the 40% to 50% range.
Just as important, increased scale is driving positive operating leverage thanks to the company’s highly scalable digital ad business model.
Gross margins rose three points in the quarter to a record-high 58.6%. The opex rate fell eight points in the quarter to a record-low 40%. Adjusted EBITDA margins clocked in at 18%, up ten points and also a record-high.
In other words, Snap’s earnings report comprised record-high usage growth, record-high ARPU growth, record-high revenue growth, and record-high margins.
That’s a good quarter. It’s no wonder SNAP stock popped to new highs after the print.
The Most Innovative Social Media Platform
The most important thing here is that Snap’s record-breaking quarter is being driven by a sustainable driver: Relentless innovation.
Snap’s management team has developed a reputation for being hyper-innovative. This innovation lives on today, on three major fronts:
- Content: Snap has built out its once nascent and niche Discover platform into a mobile entertainment hub. Over 90% of the U.S. Gen Z population watched Shows and publisher content in the fourth quarter, while Snap Originals are garnering tens of millions of viewers.
- Product: Snap is continuing to pioneer augmented reality features through its product. Over 200 million daily active users engage with AR every day on average, while many of the company’s AR lenses are generations billions of impressions within days of their launch.
- Ad Platform: Snap is pushing forward with new ad products and capabilities, such as AR-powered advertising, personalized brand lenses, and direct response advertising.
By being hyper-innovative on all three of those fronts, Snap’s management team is creating a media platform that is always fresh and exciting for users, and an advertising tool that is always actionable and valuable for brands.
So long as that remains true, Snap will remain in hypergrowth mode — and SNAP stock will keep pushing higher.
Healthy Upside Potential
Here’s the good news about Snap: There’s still lots of growth runway left.
The company closed the quarter with 265 million DAUs. There are billions of internet users in the planet. Almost all of them are on social media. Long-term, Snap should be able to leverage new AR features and original content to become a platform which is ubiquitously adopted in the “under 35” crowd. That means Snap has visibility to a 500-plus million DAUs one day.
Snap also closed the quarter with an ARPU rate of less than $3.50. Many other social media companies are netting double-digit ARPUs. Snap should get there one day, given that the company has a highly engaged, specific, and influenceable user base, and that the ad platform continues to expand its capabilities.
When all is said and done, I think that Snap by 2030 will be a $25-plus billion revenue company with 40%-plus operating margins and EPS of roughly $6. Based on a 20X multiple, that implies a long-term price target for SNAP stock of $120.
Bottom Line on SNAP Stock
Innovation always wins.
Snap is the most innovative player in the hypergrowth social media space. From that perspective, it’s easy to see why SNAP stock is a long-term winner.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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