3 Reasons Snap Stock Could Snap Back

Key Points

• Snap has rebounded more than 30% from its October 21st low.
• After a likely setback again in Q4, revenue growth is forecast to pick back up in 2023.
• Last quarter, daily active Snap users rose by 57 million.
• Snap’s next-generation user base will be impossible for advertisers to ignore.

Perhaps it's an omen that Snap Inc.’s (NYSE: SNAP) monthly chart is shaped like a boomerang. What soared through the air during the pandemic ultimately returned to where it was launched.

Down almost 90% from its September 2021 peak, the social media stock has been rudely ghosted by the market. A disappointing Q3 earnings report was the latest reason to hit the sell button. 

But if you’re a long-term growth investor, this is no time to swipe left.

For starters, buyers are starting to snap up shares. Snap has rebounded more than 30% from its October 21st low. 

Yes, this has coincided with a broader market bounce, but it shows how quickly traders are willing to bid up bruised yet volatile tech names. Extrapolate this over a long bull market and the potential runway is extensive.

But there’s a bigger picture here. The Q3 update contained some silver linings that suggest key trends in Snap’s business are healthy. 

Here’s three reasons why the boomerang could be in for another ride.

#1 - Comps Will Get Easier

During Covid lockdowns, Snap’s business exploded. People worldwide clamored for ways to stay connected, joining Snap and other popular social media platforms. As advertisers followed, so too did Snap’s financial results. But after revenue jumped 64% in 2021, the company is now on pace for far more modest growth this year. 

While inevitable, the slowdown has been complicated by a weakened ad revenue outlook tied to macro conditions and Apple’s privacy policy change. This caused management to forego guidance for Q4, a historically strong holiday-driven period. 

The good news is that comparisons to the hyper-growth period will soon fade away like a Snap video. Last year’s quarterly revenue growth figures of 42% to 116% are being replaced by minimal growth like the 6% recorded in Q3. While perceived as concerning by the market, this has formed a new base from which Snap can grow over the next few years.

After a likely setback again in Q4, revenue growth is forecast to pick back up in 2023. By the back half of next year, Wall Street sees 7% and 13% quarterly growth. Still nowhere near the glory days, but re-accelerating growth should be a welcomed development.

#2 - User Engagement is Trending Higher

One overlooked constant during Snap’s plunge is the relevance of the platform in the post-pandemic economy. Even with the emergence of TikTok and other challengers, Snapchat is a mainstay. 

Social media users tend to use multiple apps. As they add news ones, others get kicked out — but not Snapchat. In fact, Snap continues to add users. Last quarter, daily active users rose by 57 million — a 19% year-over-year improvement.   

This shows that Snap’s predominantly younger user base still loves the art of the selfie — and that the company is doing its part to keep the brand fresh and engagement high. New features like Lenses, Dynamic Stories and AR shopping are on trend with emerging technologies. They are capturing the creative minds of users globally and creating new revenue streams.

Snap has stayed in the mix by evolving from its flagship offering to an ecosystem that’s really five platforms in one. Still gaining traction in the market, Chat, Spotlight and Snap Map are poised to become bigger parts of the multiyear growth story.

#3 - Advertisers Can’t Ignore Snap

In more than 20 countries, Snap reaches 90% of the 13-24-year-old population. This is a powerful statistic because it means the company has a stranglehold on most future consumers.

In turn, Snap’s next-generation user base will be impossible for advertisers to ignore. With so many eyeballs on the platform and so many discussions taking place about things to buy and places to go, digital ad dollars are bound to head Snap’s way as the macro environment improves. 

You can’t tell by looking at the stock chart, but Snap appears primed for a turnaround. As management figures out new ways to monetize the business, the financials should match the impressive user growth. Currently, the income statement is being held back by an unfortunate but fleeting reality — there are simply more players like TikTok going after a shallower ad spending pool. Over time, a declining monetization per user metric could revert to an increasing one. 

The key here is the value of Snap’s growing user base. Investors may have ghosted the company, but advertisers can’t afford to. There will eventually come a time to remove the sad puppy filter from Snap stock and replace it with bull horns.