Is Snap Stock on the Rebound?

Although Snap Inc. (NYSE: SNAP) stock has sold off in the wake of the coronavirus outbreak, this online chat platform may offer an investment avenue to ride out this pandemic.

It is safe to say the markets are in bear territory now, and some are suggesting this will be a recession. Some of the big bears are even calling this the beginning of a depression. However, some companies may have a quicker route out of this crisis than others do. Companies that primarily operate online or have small supply chains may have the best chances at this, and social media companies are at the heart of that.

It’s not that hard to see that the stay-at-home economy has been the biggest winner from this coronavirus pandemic. As more people are practicing social distancing, and some even quarantining, these stocks have responded in kind.

Social media may not necessarily be a large part of this economy, but if people were checking Snapchat, Facebook, Twitter and Instagram at work, you can be sure they’re doing this at home much more.

What Snap Does

Snap’s primary product, Snapchat, was originally released in 2011. It was built to allow users to send pictures or videos with messages that were only available to other people using Snapchat. The messages only lasted for a short time, though the duration was lengthened in 2017.

In 2012, as Snapchat began to get global exposure, CEO and founder Evan Spiegel wrote: “Snapchat isn’t about capturing the traditional Kodak moment. It’s about communicating with the full range of human emotion — not just what appears to be pretty or perfect.” Mass communications with still photos did not have to be the standard anymore.

Snap’s platform as a photo-sharing and chat service likely will benefit from this outbreak as more users sign up. Although Snap doesn’t occupy the social media high ground like Facebook, it does have a fairly young demographic of users that are fiercely loyal to the platform.

At the end of the third quarter of last year, 53% of Snapchat users were between the ages of 15 and 25. Another 34% were between 26 and 35 years old. If schools or universities continue to be shut down in the United States, as they have been in Italy, then Snap could be a winner here. However, this all depends on user growth.

Building the Base to Bounce

For any company to be viable in the long term, it has to have solid fundamentals, and these fundamentals are built on quarterly results. When Snap released its most recent quarterly report in early February, it showed a bottom-line beat. Even though investors were not satisfied with the results, moving toward profitability was a much-needed change for the company.

For that quarter, Snap posted $0.03 in earnings per share and $561 million in revenue, which compared with Wall Street consensus estimates of $0.01 per share and $563.03 million, respectively. The quarterly results were a big step forward from a year ago, when Snap had a net loss of $0.04 per share and $389.82 million in revenue.

The company also had other notable increases. Its daily active users swelled to 218 million from 187 million last year, and average revenue per user grew 23% year over year to $2.58. Key takeaways here are that Snap is seeing solid user growth, monetizing its users better and seeing solid growth in ad revenue. The path to profitability is through these metrics.

The broader markets have not made up their minds yet, and calling a bottom is tricky. Snap has seen shares pull back 23% or so since February 25. However, with these fundamentals in place, Snap has established a solid base for a bounce.

Cash Burn

There have been concerns in the past about this company’s cash burn rate, at least among analysts. For years, analyst ratings for this stock have been less than favorable, but this could all turn around, and quickly. If these quarterly fundamentals hold up and continue, cash burn concerns will be a thing of the past. At this point, Snap can focus more on its ad spending and on growing its user base even more.