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Is It Too Late to Buy Snap Stock?

Snap (NYSE: SNAP) posted a dazzling second quarter report on July 22, and the stock skyrocketed to an all-time high the following day. The social media company's revenue soared 116% year over year to $982 million, beating expectations by $135 million, while its daily active users (DAUs) rose 23% to 293 million.

Snap's revenue and DAUs rose at their fastest rates in four years. Its net loss narrowed from $326 million to $152 million, and it generated a positive adjusted EBITDA of $117 million, compared to a loss of $96 million a year ago. Its non-GAAP earnings of $0.10 per share easily surpassed Wall Street's expectations for a loss of a penny per share.

For the third quarter, Snap expects its revenue to rise between 58% and 60% year over year and for its adjusted EBITDA to increase between 79% and 114%. Those growth rates are undeniably attractive, but is it too late to get in on the fun and buy the stock after its post-earnings pop?

Image source: Getty Images

Snap's core growth metrics

During the second quarter, Snapchat's DAUs rose 6% year over year to 95 million in North America, and 10% to 78 million in Europe. That represented an acceleration from its 5% growth in North America and 9% growth in Europe in the first quarter.

Snap's "Rest of World" DAUs surged 55% to 120 million, compared to its 57% growth in the previous quarter. During the conference call, CFO Derek Andersen attributed its robust overseas growth to its "ongoing investments in local content, local language support, marketing partnerships, and the popularity of augmented reality Lenses created by our global community."

Snap also attributed some of its DAU growth to Spotlight, the TikTok-like short video platform it launched last November and aggressively promoted with cash prizes. Spotlight's DAUs rose 49% sequentially, while the platform's average daily content submissions more than tripled.

Snap's average revenue per user (ARPU) growth also outpaced its DAU growth. Its total ARPU jumped 76% year over year to $3.35, with 116% ARPU growth in North America, 76% growth in Europe, and 20% growth in the Rest of World category. All three regions generated accelerating ARPU growth.

Snap benefited from an easy comparison to its flat ARPU growth in the prior-year quarter, when the pandemic throttled ad purchases, but its ARPU also rose quarter over quarter across all three regions.

Snap attributed that growth to its ongoing investments in its sales and sales support teams. Snap's videos, AR lenses, and games are also likely causing users to spend more time within the app.

Rising ad prices and improving cost controls

Snap's eCPM (effective cost per thousand impressions, or the average cost of its ads) surged 122% year over year in the second quarter, accelerating from its 67% growth in the first quarter of 2021, 46% growth in the fourth quarter of 2020, and 20% growth in the third quarter of 2020.

That ramp-up indicates Snapchat's popularity with Gen Z and younger Millennial users gives it plenty of pricing power in the advertising market. It also suggests investors shouldn't worry too much about competition from ByteDance's TikTok and Facebook's (NASDAQ: FB) Instagram.

Andersen attributes Snap's eCPM growth to "the rapid rise in overall demand, improved optimization capabilities within our auction, a mix shift toward relatively higher eCPM products, as well as a mix shift toward relatively higher eCPM regions such as North America."

As Snap's ad prices rose, its infrastructure costs per DAU dropped 10% year over year to $0.62 as it negotiated better cloud hosting rates and streamlined its engineering teams. As a result, its gross margin expanded nine percentage points year over year to 55%, and supported its big bottom-line beat.

But is Snap's stock too hot to handle?

Snap's growth rates suggest it has plenty of staying power in the social media market, but its valuations already reflect a lot of that optimism. Wall Street expects Snap's revenue to rise 56% this year, with a non-GAAP profit. Those estimates will likely be raised after its earnings beat.

Based on those forecasts, Snap's stock trades at 28 times this year's sales. Facebook, which is firmly profitable but growing much slower than Snap, trades at nine times this year's future sales.

Snap might seem expensive, but its valuation hasn't risen significantly since its IPO in early 2017, even though it's advanced more than 350%. Back at $17 per share, Snap was valued at about $24 billion, or 29 times the revenue it eventually generated in 2017 -- before it even started trading.

At the time, I didn't think Snap was worth buying. It didn't have a clear vision for the future, and its losses were staggering. However, I turned bullish on Snap in 2019 after it survived Instagram's initial onslaught.

Snap is a very different company today. It's locking in users with new short videos, Lenses, games, and e-commerce features, while growing in all the right places. Therefore, I believe its strengths easily justify its premium valuation, and it definitely isn't too late to buy this high-growth social media stock.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Snap Inc. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.


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