Long-term investors should buy Snap (NYSE:SNAP) stock, as the company’s second-quarter results show that it’s continuing to benefit from strong, positive trends. Moreover, the social media company should get a boost from a stronger post-pandemic advertising environment.
Snap’s second quarter revenue increased 17% year-over-year to $454 million, versus analysts’ average estimate of $44.5 million. The fact that the company’s revenue jumped by 17% YOY, despite the challenging advertising environment was impressive.
Those who are bearish on Snap stock emphasized the fact that its daily active user base came in slightly below the average estimate. But the daily average user count increased 17% YOY and, as I’ve noted in the past, user growth is not the end-all-and-be-all for Snap. Although user growth is certainly good for the company, higher engagement levels on their own can improve the company’s financial results, causing the shares to climb further.
Speaking of higher engagement, Snap reported some strong data on that front. Seeking Alpha noted that “the average number of Snapchatters watching Shows rose by 45% {YOY}, and those over age 35 engaging with Discover content was up 40%.”
The latter data point shows that the app’s appeal is, as I’ve previously predicted, spreading beyond young people. I expect that trend to continue and intensify as millennials who grew up with Snap continue to age and as information about Snap spreads to more middle-age people through advertising and word-of-mouth. Finally, on average, users opened up the app over 30 days last quarter, showing that overall engagement is fairly strong.
Bullish Q3 Guidance and a Positive Q3 Outlook
Snap didn’t officially provide Q3 guidance, but it did note a very important, extremely positive data point that indicates that it’s doing very well this quarter.
Specifically, the company reported that , through the first 19 days of the third quarter, its sales had jumped 32% YOY, up from the 17% YOY increase of its sales in Q2. That’s not only bullish for the third quarter but suggests that Snap’s ad revenue is increasing as the economy opens up. That, in turn, indicates that Snap’s financial results should greatly improve when the pandemic ends.
Snap did add a cautionary note which likely dampened enthusiasm for Snap stock. Specifically, the company warned that “advertising demand in Q3 has historically been bolstered by factors that appear unlikely to materialize in the same way they have in prior years, including the back to school season, film release schedules, and the operations of various sports leagues.”
As a result, Snap said it expects the YOY increase of its Q3 sales to be below the 32% gain it saw through the first 19 days of July.
Especially if there’s a second wave of the pandemic starting in September, that will probably prove to be an accurate forecast. But other sectors of the economy, such as e-commerce, home sales, PCs/ laptops and food delivery are trending much stronger than usual.
Moreover, as I’ve pointed out in previous columns, most upper-middle-class and wealthy consumers are doing quite well financially during the pandemic. Consequently, I expect Snap’s advertising revenue to increase at least as much YOY in Q3 as it did in Q2. And after the pandemic is over, its ad business should surge a great deal as marketers look to capture consumers’ pent-up demand for a wide variety of goods and services.
The Bottom Line on SNAP Stock
Snap’s second quarter results and its limited guidance for the third quarter show that its revenue, user and engagement trends are all very strong. Moreover, in the medium term and long term, Snap should do very well, driven by the rebound of its advertising revenue and continued increases in its user base.
Further, the market capitalization of Snap stock is still just $31 billion, versus Facebook’s (NASDAQ:FB) $794 billion. Over time, I expect Snap’s market capitalization to move much closer to that of Facebook.
As of this writing, the author did not own any of the aforementioned stocks.