Snap Inc. (NYSE: SNAP), the parent company of Snapchat, has seen incredible growth in revenue this quarter as COVID-19 drives consumers to longer social media usage. Most of us younger investors have grown up with having Snapchat alongside other social media giants like Facebook and Instagram. The social media giant yields an impressive Market Cap of $24.16 Billion and 229 million daily users. Snap’s recent 2020 Q1 report has shocked investors, producing a 44% revenue increase from last years Q1 results. But before going into Snaps recent Q1 results and whether it’s worth the investment, let’s analyse Snap’s short history on the New York Stock Exchange:
- SNAP’s initial public offering was overvalued as investors were concerned over the profitability of it’s main product Snapchat.
- SNAP’s stock price fell as low as $5 in December 2018 as investors feared Snapchat was losing relevance and users in the social media sphere.
- Snap bounced back in 2019, producing greater daily usage and intertwining a more profitable advertising strategy.
- The stock reached as high as $19 pre-COVID as investors rallied behind consistent usage growth.
- COVID-19 impacted SNAP’s stock price, almost halving it’s pre-COVID value before a swift recovery.
Why did Snap surge by 36% on Wednesday?
The bear was violently tearing down SNAP’s share price throughout February and March. However, it seems the coronavirus lockdown is allowing SNAP to fight back. Mainly, because the government’s command for us to stay home is triggering Snapchat’s user activity to go through the roof.
Today SNAP surged off the back of strong Q1 2020 financials. The key financial highlights include:
- Daily active users soared by 20% year-on-year (YOY) = 229 million current users
- Operating cash flow = $6 million vs -$66 million Q1 2019
- Revenue surged by 44% = totaling $462 million
- Operating loss = -$286 million, which is still a solid financial achievement when compared to the -$316 million in Q1 2019.
Investors were over the moon with SNAP’s 2020 financials for three reasons.
First, COVID-19 is beating down most stocks. Thus, when SNAP can produce positive financials in a pandemic, it provides investors with confidence that the company should survive COVID-19. Secondly, pre-coronavirus investors were driving SNAP close to its IPO level. Thus, with SNAP almost trading at a V-recovery, the idea of the company surging past its IPO is a real possibility. Lastly, many investors were predicting COVID-19 to reduce advertising on social media significantly. However, SNAP proved analysts wrong after posting a 44% increase in revenue.
In turn, the above three reasons triggered the explosive rally behind SNAP on Wednesday.
Is Snap a viable investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
You might be wondering whether you missed the boat. In the short term, I would say yes. Because we can expect the bullish run to cause a sell-off in the imminent future. (opinion not advice) However, SNAP holds upside potential in the medium to long-term.
SNAP was experiencing significant momentum before COVID-19. Mainly due to strong financials and a growing amount of businesses advertising on Snapchat. The momentum should resume once COVID-19 fizzles out. Because the new digital economy should see an endless number of companies looking to advertise on Snapchat and Facebook.
While SNAP is navigating itself through the treacherous COVID-19 waters exceptionally well, there is one risk. SNAP acknowledged in a discussion with analysts that “many advertising budgets declined due to COVID-19”, during March. Thus, the 44% surge in revenue probably came from the explosive growth in January and February. If the March trend of budget declines continue, then SNAP could see revenue plunge. Ultimately, triggering a bearish decline in the stock.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin and Tyger Fitzpatrick, Senior Manager, and Founder of YIG.