This is One of the Best Growth Stocks to Buy Today

Shares of social media company Snap (NYSE:SNAP) impressively bucked the broader market sell off on Tuesday, Feb. 23. Instead of plunging like many of its tech peers, SNAP stock actually rose more than 5% on the day.

Why? Because of an impressive 2021 Investor Day event, in which Snap management painted a bullish picture of the company’s growth prospects over the next several years.

Was Snap’s Investor Day event really that good? Good enough to turn what was going to be a big-down-day for SNAP stock, into a big-up-day?

Yes. It was that good. In fact, it was so good, that I’ve revised my forward growth estimates on Snap materially higher to account for bigger user growth, bigger revenue growth, and bigger profit margin expansion.

Thanks to those revisions, I’m also upping my price target on SNAP stock to a Street-high $85.

Here’s a deeper look.

SNAP Stock: Strong Investor Day

Snap’s Investor Day event was really, really good.

There was one headline number which really stood out, and that was: 50%. Specifically, management expects to rattle off multiple consecutive years of 50%-plus revenue growth in the early 2020s.

That’s mind-boggling. Really. Consensus sell-side estimates are currently calling for 49% revenue growth in 2021, followed by 35% revenue growth in 2022 and 34% revenue growth in 2023 — so, Wall Street is currently modeling for Snap to have zero years of 50%-plus revenue growth going forward.

But management just said that the company will do multiple years of 50%-plus revenue growth.

If true, then that means sell-side estimates on SNAP stock are far too low, and that they will move higher in the coming weeks. SNAP stock is valued roughly off of those estimates. Thus, as the estimates move significantly higher, SNAP stock should also move significantly higher.

Of course, there is the big “if” there. These estimate revisions will only happen if Snap can actually grow revenues by 50%-plus over the next several years.

I think that’s possible, given the compelling case that management made during the event.

Huge User Growth Potential

Snap underscored at Investor Day that the company has what it takes to make the Snap platform a global digital entertainment ubiquity for Millennial and Gen Z consumers everywhere.

Currently, Snap is used by 75% of all 13 to 34 year-olds in the U.S. Those young consumers are opening Snap up 30X a day, for various use-cases including:

  • Taking pictures (Snap has arguably a better camera software than the built-in camera software on most phones, and it is equipped with unique, engaging lens, some of which have augmented reality capability).
  • Talking with friends (Snap dominates when it comes to instant, ephemeral messaging between friends, especially when such communication includes the sharing of photos and videos — which it increasingly does these days).
  • Watching funny videos (Snap’s new Spotlight feature is a TikTok-style feed of often-funny user-generated short videos).
  • Watching original shows (Snap has created a robust content of original TV shows and mini-series which are being widely watched in-app).
  • Seeing what’s going on in the world (Snap Map is a cool, very unique feature which users can leverage to see what their friends are up to and what is happening real-time at various locations based on user-uploaded Snaps).

Importantly, these use-cases are not U.S.-exclusive. Consumers in Canada like to take pictures, too. Folks throughout Europe like to talking with friends, too. People in Asia are fans of watching funny videos and original content on phones, too.

Thus, Snap has a unique and compelling opportunity to replicate its U.S. chokehold among Millennial and Gen Z consumers, on a global scale. That’s incredibly bullish for SNAP stock.

There are about 2.5 billion internet users globally between the ages of 13 and 49. Just a 40% penetration into that TAM implies a potential user base here of 1 billion.

That’s why, over the next decade, I see Snap sustaining ~10% user growth.

Huge Revenue Growth Potential

Snap also underscored at Investor Day that it is doing everything right to maximize the financial value of its users.

As a super-addicting, super-engaging platform, Snap is naturally a place where a lot of young users do a lot of things, meaning Snap has a lot of data and opportunity to sell highly-effective ads to those consumers. This is especially true since all of Snap’s ad inventory — Snap ads, Story ads, AR lenses, and Filters — are visual-heavy and interactive. Innately, Snap’s ad inventory is high-quality inventory.

Over the past few years, the company has made some major advancements to expand the functionality of its ad platform. A few of these advancements include Dynamic Ads, Brand Profiles, Platform Bursts, Auction Forecasting, Trending on Snap, Local Ads, Snap Minis, Place Listings, and more.

This increased ad platform functionality has coupled with Snap’s innately high-quality ad inventory to spark a surge in Average Revenue Per User (or ARPU) rates. Since 2015, Snap’s ARPU has increased by 17X.

And yet, Snap’s North America ARPU rate of about $17, is just 30% that of Twitter’s ARPU rate ($58) and 9% that of Facebook’s ARPU rate ($196).

Given Snap’s highly-effective ad platform and valuable ad inventory, it is very likely that — over time — Snap’s ARPU rates will trend towards $100 and higher.

That’s why I see Snap’s ARPU growing at a ~20% compounded annual growth rate over the next decade. On top of 10% user growth, that paves a path for durable 30%-plus revenue growth — which, of course, is bullish for SNAP stock.

Huge Profit Growth Potential

Maybe the thing I was most impressed about during Snap’s Investor Day was the company’s confidence in its ability to continue to drive positive operating leverage.

Snap is a digital advertising company. Digital ad business models have high gross margins and tons of scalability. That is, costs per user do not rise much over time.

Total costs per user at Snap — defined as opex per user plus cost of revenue per user — have been relatively steady since 2017. Over that same stretch, ARPU has more than doubled.

This has produced significant positive operating leverage at Snap.

More importantly, this trend should persist, because the company’s cost structure won’t change much going forward, and ARPU rates will only keep soaring.

That’s why I see Snap’s profit margins from about 2% last year, to over 40% by 2030. This robust profit margin expansion should turn durable 30%-plus revenue growth at Snap, into 40%-plus profit growth.

Indeed, I now see Snap’s 2030 earnings per share rising towards $9 (from an earlier estimate of $6). Based on a 20X forward earnings multiple and a 10% annual discount rate, that implies a 2021 price target for SNAP stock of nearly $85.

Bottom Line on SNAP Stock

A strong Investor Day event underscores that SNAP stock is one of the best growth stocks to buy today.

— Luke Lango

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Source: Investor Place