This confers us a fair value of $102, imputing an upside of 42% from its current share price. We see EV/REV of 25x 2022E Revenue as fair and see management outdoing its own bullish revenue growth expectation of CAGR over the next three- to five-year cycle. We believe the next two quarters will be the high noon for SNAP’s long-term growth trajectory as the impact of the iOS 14 update becomes clearer on its earnings.Įven though valuations are pricey, we believe the premium is warranted, emblematic of strong recent execution and best of breed growth profile. Majority of SNAP’s revenue is still generated in the US, which is led by the Apple user base ( 54.4% market share of smartphones). However, SNAP does not come without its risks, as we see the recent introduction of iOS 14 software update, limiting advertisers' ability to track, retarget and measure ads displayed to Apple ( AAPL) users as especially disconcerting. After SNAP turned adjusted EBITDA positive in Q3 of 2020, we see a clear path to profitability corroborated by the high operating leverage inherent in social media platform businesses. We see management forecasts of 50% revenue growth over the next three to five-year cycle as achievable given that monetisation (SNAP ARPU vs $32 for FB) remains relatively in early stages. We see increased recent investments mostly to grow its vertical focused sales team and continued innovation, especially that in AR with the aim of increasing engagement of users, ultimately improving ROI for advertisers as both, commendable and disciplined. This in turn has resulted in accelerating its own eCPM (revenue per impression) by 50% to 100% over the past year and powered revenue growth which has climbed CAGR over the past two years to 2020. However, a range of successful investments to improve ad targeting and ad measurement capabilities in the last two years, coupled with the restructuring of its sales team to focus on becoming sector specialists (away from being regional specialists) has seen SNAP increase advertisers ROI on its platform. Given its strong focus on privacy and limited quantum of personal information, users were willing to share on its platform, investors were skeptical of SNAP’s monetisation capabilities vs Facebook in the past. Even though a challenger to Facebook (FB), SNAP has a strong track record of successful innovations, showcasing multiple successful product introductions which now mostly have all been encroached upon by rivals such as its disappearing messages, Stories, vertical video format and AR lenses to list just a few. We see Snapchat ( NYSE: SNAP) as a leading innovation factory in the social media space, benefitting from best-in-class growth profile, a large and sizeable TAM, strong industry positioning, and prescient co-founders, spearheaded by CEO Evan Spiegel and CTO Bobby Murphy. NYCstock/iStock Editorial via Getty Images Investment thesis: When the innovation factory gets its growth playbook right - initiating coverage at "buy"
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