Stock of the Month: SNAP INC. (SNAP)

Written by Donnie Nguyen

July 20, 2019

SNAPCHAT IS A WILDLY POPULAR APP AMONGST MILLENIALS

This month’s stock pick is SNAP Inc. (NYSE: SNAP), the creator of the popular Snapchat app. It’s hard not to know about this company. If you’re under age 35, you probably use Snapchat. If you’re older, you probably have kids, nieces, nephews, or millennial co-workers that use it. It’s used by 90% of all 13-24 year-olds and 75% of all 13-34 year-olds in the U.S.

The stock hit a low of $4.82 in December. Now, just 7 months later, it’s 291% higher with a Friday closing price of $14.02. Can Snap continue this storied growth? I think it can. Read on to find out why.

SOCIAL MEDIA ADVERTISING CONTINUES TO RISE

According to this Washington Post article, digital advertising will surpass print and TV for the first time this year with companies expected to spend $130 billion on digital ads. Facebook’s (NASDAQ: FB) share is about 22%. As someone who has used both Google (NASDAQ: GOOGL) search ads and Facebook ads, I much prefer advertising on Facebook. Audience targeting is more specific and the prices I pay per click on Facebook are less than on Google. This type of advertising power used to only be available advertising agencies with huge budgets. Now anyone with a Facebook account can start advertising with a few dollars. I believe that social media advertising is still in its infancy and will surpass search ads in the next 10 years.

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When it comes to social media stocks, there are only 5 major players.

Facebook is the market leader. I own Facebook stock and think it will do very well in the long-term provided government regulations don’t hurt them too much. They just paid off the government $5 billion, which is chump change for them.

Twitter (NYSE: TWTR) is also a great platform and I like the stock, but their latest quarterly revenue growth was only 18.4%. Compare this with 26.0% for Facebook and 38.9% for Snapchat.

LinkedIn is an awesome platform, but it’s under the Microsoft (NASDAQ: MSFT) umbrella. It grew revenues by 29.6% in its 9 months ended March 31st, but it only represents 6% of Microsoft’s revenues.

Bytedance is a private company, so we can’t invest in it (unless you happen to be a private equity trader).

FACEBOOK VS. SNAP

So the decision boils down to Facebook versus Snap. 

Like I said before, I like Facebook and I also own the stock, but I’m going to go with Snap for my stock of the month pick because I think it has much higher growth potential.

Facebook has a $566.2 billion market cap. Assuming no major setbacks, I think Facebook can double to become a $1 trillion market cap stock. It may take 5, 10, or 20 years but I believe it will happen. In the same timeframe that it takes Facebook to double, I think that Snap will quadruple or more. As Facebook gains market share, the increase will have less of an impact on their stock because they’re already so big. But for every 1% of market share that Snap takes, it will have a much bigger influence on their market cap.

RISKS

Snapchat has clearly had some successes. First, 

Snapchat grew to over 190 million daily active users (DAU) in Q1 2019 according to Statista. Second, the founders turned down Facebook’s $3 billion buyout offer in 2013, which was a great move since their stock currently has a market cap of $19 billion. That’s essentially a 633% gain in 6 years by turning down Facebook’s offer. Third, they didn’t have any involvement with the Russian meddling of the 2016 U.S. elections.

But they’ve also had some major setbacks. 

First, Facebook-owned Instagram copied several of Snapchat’s features, which may have slowed Snapchats DAU growth since more users could just use Instagram instead of Snapchat.

Second, Snapchat’s 2018 redesign was a blunder and caused the first DAU quarterly decline in the company’s history. The redesign also lost key influencers like Kylie Jenner to Instagram.

Third, Bytedance’s TikTok is an up and coming competitor which may take some of Snap’s revenues.

Like Facebook and Google, Snap’s founders control the majority of the company through dual-class voting shares. Clearly, Facebook and Google founders have crushed it for shareholders since their respective IPOs. Only time will tell whether or not Snap’s founders can do the same for their shareholders. We’ll have to wait and see how this story plays out.

If Snap’s DAU and revenue growth doesn’t continue to push higher, I may consider selling.

CHART ACTION

On the daily chart, SNAP’s price is above its 50-day, 150-day, and 200-day moving averages and those MA’s are trending higher. This could mean that there has been bullish buying from institutional investors. Institutional investor interest is a good sign.

Stats (as of 7/19/2019)

  • Market Cap: $19.0B
  • DAU: 190 million
  • Closing Price: $14.02
  • Revenue Q2: $320.4 mil
  • Revenue Growth (Q2 yoy): 38.9%
  • Net Loss Q2: $310,407
  • Net Loss Decrease (Q2 yoy): 19.3%
  • EPS: -0.23
  • Debt/Equity: 23.4%

Should I Buy?

Snap could be a great addition to a portfolio that needs exposure to:

  • The Technology Sector
  • The Internet Content & Information Industry
  • Social Media Stocks
  • Growth Stocks

Be sure to do your own research and determine for yourself if Snap is a good stock for your portfolio.

How Much Should I Buy?

Here are some portfolio guidelines we Wolves try to live by:

  • Thou shalt not hold more than 35% in any one particular sector
  • Thou shalt not invest more than 10% of principal into 1 individual stock
  • Thou shalt make small purchases. The general rule of thumb is to spend no more than 2% of your portfolio on a single purchase and build up your position over time.

The Bottom Line

Snap is a social media company that’s very popular with millenials. It has explosive revenue growth but negative bottom-line earnings. Unlike its main competitor, Facebook, it could still be in the very early stages of its growth phase. Now might be a good time to start a position.

DISCLOSURE

I/we own shares of stock in FB and SNAP.

Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.

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Donnie Nguyen

Donnie Nguyen

Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.

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