In a social media-driven world it should not shock you that the bulls are cheerleading a strong 2021 run for Snapchat. The contagious photography platform is expanding its customer base during the pandemic, which is pleasing to investors in terms of financial growth. While the bulls are telling a story of bodacious financial, customer, and share price growth come 2021, an investment does hold risk. Thus this article looks to provide both the bullish and bearish Snapchat (NYSE: SNAP) stock forecast.
Table of contents
- Bullish Snap stock forecast 2021
- Bearish counter-arguments
Snap stock forecast – bullish
Analysts & price forecasts
Snapchat analysts and price forecasts are relatively bullish. From the 39 analysts watching SNAP, 25(75%) are suggesting buy. Contrast that to 2 (6%) recommending to sell and 11 (33%) to hold. To say SNAP is bullish by just looking at the analyst registry would not be the smartest. The 12-month price forecasts from the above analysts are a high of $52, a low of $20, and a median of $40. Initially, a forecast of $20 is unattractive as it would provide investors with an ROI of -51.9%. However, considering only two analysts out of the 39 are championing sell, the low of $20 should be treated as more of an outlier. (opinion not advice). Moreover, analyst Michael Morris rose his price target from $36 to $52, as he remains “confident in the company’s long-term revenue and cash flow potential“. Thus, the analyst and price forecasts are largely bullish, but investors should have a mitigation plan in place before investing.
Despite unprofitability, Snapchat’s financial muscle lies in having healthy cash flow and positive revenue and earnings projections.
Snapchat’s revenue expansion took, and continues to take, a linear path. However, the same cannot be said for SNAP’s negative earnings, which resembles that of a trench. The Facebook competition lawsuit was a major factor in sinking Snapchat’s earnings. Despite escaping the trench, Snap earnings seem to remain stagnate. However, after the impressive growth in Q3 earnings, investors could argue that the path to profitability is now in action. Analysts would agree with this conclusion as they forecast Snapchat to become profitable, and have a positive EPS in December 2022.
Moreover, SNAP holds $2.7 billion in cash and short term investments. Not only can this cover debt, but it provides the social media platform with a three-year cash runway. If we put this all together, revenue and cash are strong, and Snapchat must achieve profitability in three years. Considering analysts expect profitability in two years, it is fair to say the bulls are not ridiculously optimistic.
Inevitable growth in social media
The explosion of social media usage during 2020 is another reason for the bullish optimism come 2021. Snapchat, like the rest of its social media siblings, is continually building on its platform to grow its customer base. For example, this year the addition of augmented reality, Snap Games, and discover was a like vacuum for more users. Snap’s 18% YoY growth in daily active users confirms this argument. Not to mention the way we consume information and connect is forever changed, especially in light of the virus. Between Snapchat, TikTok, Facebook, Instagram, and Twitter people have access to on-demand 24/7 news, businesses can advertise their products, and people can visually share their lives and feelings. The tracks are in place, and the social media train is not stopping or slowing down for a long time. Hence, long-term investors are equating a social media-driven world with higher revenue, earnings, and users for Snapchat.
Snap stock forecast – bearish
The two areas of concern are negative earnings and shareholder dilution. In the past year, SNAP diluted shareholders by 6.4%. Dilution is understandable if the business needs to raise extra cash to fund a strategic decision like acquiring a competitor or expanding. However, considering Snapchat is sitting on a hefty cash pile investors should raise eyebrows on the shareholder dilution.
Overall, Snapchat has strong upside potential with little downside risk as its cash runway can support the current unprofitable model for three years. (opinion not advice) The overarching trend of social media growth should serve to boost Snapchat’s user base, and thus revenue. However, an investment does hold risk, especially in the profitability department. SNAP’s current unprofitability should be a red flag for fundamental investors. Monitoring upcoming earnings, especially the next one on the 9th of February, are key to make sure the path to profitability is truly in action.
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The information above is not 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 Senior Manager, Patrick McLoughlin