Shares of Snap (NYSE:SNAP), the parent company of Snapchat, recently slipped after the company followed up its strong fourth-quarter earnings report with mixed guidance for the year ahead.
Its revenue rose 62% year over year to $911 million, beating estimates by $56 million and marking its strongest quarterly growth in three years. Its daily active users (DAUs) rose 22% to 265 million, accelerating from the previous quarter and exceeding its previous guidance for 18% growth.
On the bottom line, Snap’s adjusted EBITDA nearly quadrupled to $166 million, and its adjusted EBITDA turned positive for the full year. Its non-GAAP EPS tripled to $0.09 and beat estimates by two cents.
Those numbers look great, but Snap’s guidance was mixed. It expects its revenue to rise 56%-60% year over year in the first quarter, but it expects its adjusted EBITDA to turn negative again.
It also warned that some companies paused their ad purchases for two weeks after the Capitol riot in January, and that Apple‘s upcoming privacy changes in iOS 14 could impact its growth. Those near-term concerns spooked the bulls, but I believe Snap remains a great long-term buy, for 10 simple reasons.
1. It’s still Gen Z’s favorite platform
Snapchat continues to grow in Facebook‘s (NASDAQ:FB) shadow because it remains more popular with Gen Z users. In Piper Jaffray’s latest “Taking Stock with Teens” survey, 34% of U.S. teens chose Snapchat as their favorite social media platform — putting it ahead of ByteDance‘s TikTok (29%) and Facebook’s Instagram (25%).
2. It’s gaining a lot of overseas users
Snapchat is also gaining momentum overseas. Its DAUs grew just 6% year over year to 92 million in North America last quarter, but rose 10% to 74 million in Europe and jumped 55% to 99 million across the rest of the world.
Snap doesn’t disclosed its user growth in each country, but it’s repeatedly cited India — which banned TikTok last year — as a major growth market.
3. It could benefit from Facebook and Twitter’s mistakes
Facebook and Twitter (NYSE:TWTR) are both being pilloried for enabling users to spread hate speech and misinformation. Facebook also faces antitrust pressure and calls to spin off WhatsApp and Instagram into separate businesses.
All that chaos could send more users and advertisers to other social media networks like Snapchat and Pinterest, which are both better insulated from those political and regulatory headwinds.
4. Its AR ecosystem is expanding
Over 200 million DAUs use Snap’s AR features, which include its filters, label-scanning tools, and landmark-enhancement tools. That ecosystem is self-sufficient and growing, since it encourages users and advertisers to create their own AR tools with its Snap Kit.
5. Its videos are gaining more viewers
Over 90% of the Gen Z population in the U.S. watched Snapchat’s shows and publisher content in the fourth quarter. Older users (over the age of 35) also spent more than 30% more time year over year engaging with that content each day.
The stickiness of Snap’s AR and video ecosystems, which enable it to display more ads per user, boosted its global ARPU (average revenue per user) 33% year over year to $3.44 during the fourth quarter, which marked its strongest growth in five quarters.
6. Its growth potential in video games
Snap launched Snap Games, a platform for in-app video games, nearly two years ago. Last June, Snap declared that over 100 million users have played its games — and that number likely rose throughout the pandemic as developers rolled out more games. The growth of that ecosystem, which encourages users to play as their own Bitmojis and socialize with other users, could further boost its ARPU.
7. Rising eCPM
Snap’s eCPM (effective cost per thousand impressions, or the average cost of Snap’s ads) rose 46% year over year during the fourth quarter, marking an acceleration from its 20% growth in the third quarter.
Snap’s eCPM is rising because it’s selling a higher mix of pricier video ads. That growth indicates Snap still enjoys plenty of pricing power against Facebook, Twitter, and other platforms, since advertisers still covet its loyal base of Gen Z and millennial users.
8. Narrowing losses
Snap still isn’t profitable on a GAAP basis, but it narrowed its loss from $1.03 billion in 2019 to $945 million in 2020. Those numbers could gradually improve as it reins in its stock-based compensation — which consumed 30% of its revenue in 2020.
9. Improving cash flows
Snap ended 2020 with a negative free cash flow of $225 million, which marked a significant improvement from its negative free cash flows of $341 million in 2019 and $810 million in 2018. It’s still sitting on $2.54 billion in cash, cash equivalents, and marketable securities — so it still has plenty of time to narrow its losses.
10. It’s still reasonably valued
Analysts expect Snap’s revenue to rise 44% in fiscal 2021. It could face unpredictable headwinds this year, but it trades at about 20 times next year’s sales — which still makes it cheaper than many other high-growth tech stocks. That’s why I’m sticking with Snap, which I originally bought at $15 per share, for the long haul.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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