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Is the Surge in Snapchat Stock Sustainable or a Temporary Boost?

Snapchat (SNAP) - ★★★★★ - Ranked #2 in our Q2 2024 SMID Equity Rankings

Snap Inc., the parent company of the popular social media app Snapchat, has seen its stock rebound sharply over the past month, gaining an impressive 53% after a lackluster start to the year. As of mid-May 2024, Snapchat's stock is down just 2% year-to-date, a far cry from the double-digit declines the stock performance was experiencing just a couple of months ago.

For investors who heeded our call in March 2024, when we identified an intermediate-term opportunity in Snapchat and set a $15 price target for the next 12 months, representing a potential 26% upside from the stock's then-price of $11.85, the recent rally has been a rewarding vindication of our analysis.

At the core of our bullish thesis on Snapchat has been the company's ability to reignite user growth and, more importantly, monetize its sizeable user base through innovative advertising products and services like Snapchat+, a premium subscription offering launched in 2022.

The most recent earnings report from Snap Inc. has provided concrete evidence of the company's progress on both fronts. The daily active user count for Snapchat grew by an impressive 10% over the past year, reaching 422 million worldwide. While user growth in North America has remained flat at 100 million, the app's global appeal, particularly among younger demographics, continues to expand.

Monetizing this user base has been a key priority for Snapchat, and the company's efforts are bearing fruit. In the first three months of 2024, Snap Inc. reported revenue of $1.19 billion, a 21% increase from the same period last year and surpassing analyst estimates of $1.12 billion. This marks a significant turnaround from the previous six quarters, during which the company experienced single-digit growth or outright declines in revenue.

The driving force behind this revenue resurgence has been advertising, which contributed a staggering $1.11 billion to Snap's top line in the first quarter. As brands continue to recognize the value of reaching Snapchat's highly engaged, predominantly younger user base, the company's advertising offerings have gained traction, supported by innovative ad formats and targeting capabilities.

Source: Tradingview

Snap's ability to revive its advertising business is particularly noteworthy in the face of broader economic challenges that have led to significant pullbacks in marketing spend across various industries. The company's success in this area underscores the appeal of its platform to advertisers seeking to connect with a coveted demographic that is increasingly difficult to reach through traditional media channels.

While Snapchat's user growth and advertising momentum are undoubtedly positive developments, it's important to note that the stock's recent run-up has brought forward a significant portion of the opportunity we identified in March. At that time, we believed the stock could reach $15 within 12 months, representing a 26% upside from its then-price of $11.85. With the stock already trading above $16 as of mid-May, much of that potential gain has already been realized.

Furthermore, the surge in bullish options activity surrounding the $16 strike price for June 2024 expiration suggests that many traders may have already priced in a significant portion of the upside potential in the near term.

However, our overall positive outlook on Snapchat remains intact, and we continue to view the company as a compelling investment opportunity within the small-to-mid-cap technology space. In our Q2 2024 Small - Mid Cap Equity Rankings, Snapchat secured the #2 position, reflecting our confidence in the company's ability to sustain its growth trajectory and capitalize on the evolving digital advertising landscape.

While an advertising slowdown remains a potential risk factor, given the industry's cyclical nature and its outsized impact on Snapchat's revenue streams, the company's continued user growth and innovative monetization efforts provide a solid foundation for long-term success.

As we look ahead, it will be crucial for Snapchat to maintain its momentum in user acquisition, particularly in key growth markets outside of North America. The company's ability to retain and engage its existing user base, while attracting new users through innovative features and partnerships, will be a critical determinant of its future performance.

Moreover, Snapchat's success in monetizing its platform will depend on its ability to continuously evolve its advertising offerings, leveraging data and machine learning to deliver more effective and targeted ad experiences. The recent introduction of Snapchat+, the premium subscription service, represents a promising diversification of revenue streams, one that could further bolster the company's financial performance and reduce its reliance on the cyclical advertising market.

In the crowded and ever-evolving social media landscape, Snapchat's positioning as a platform favored by younger demographics remains a key differentiator. While competitors like Meta Platforms' Facebook boast significantly larger user bases, with over 2.1 billion daily active users, Snapchat's appeal to the coveted youth market presents a unique opportunity for advertisers seeking to connect with this crucial demographic.

As the company continues to innovate and refine its offerings, its ability to maintain its cultural relevance and coolness factor among younger users will be paramount. Failure to do so could erode its competitive advantage and jeopardize its long-term growth prospects.

In conclusion, Snapchat's recent stock performance and underlying business momentum have validated our positive outlook on the company. While the recent rally has brought forward some of the potential upside we initially envisioned, our conviction in Snapchat's prospects remains strong at this time.

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The information provided in this report is for general informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The opinions expressed in the report are our own and are subject to change without notice. We may have a position in the securities mentioned in the report, and we may buy or sell such securities without notice. Any investment decisions made based on the information in this report are solely the responsibility of the recipient. We do not accept any liability for any direct, indirect, or consequential loss arising from any use of this report or its contents.


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