After a long period of sideways price action, social media Snap (SNAP) stock started to take off once again last October. The reason? One major factor was its continued revenue growth. Tailwinds from the COVID-19 pandemic’s “stay at home economy,” which led to increased use of its platforms, outweighed the initial plummeting of advertising demand following the initial outbreak.
Another major factor has been its continued move into the augmented reality, or AR, hardware space. This move could do more than provide Snap with an additional business line. With the integration of e-commerce into AR, it could change the game for its main line of business, which is advertising, as well. (See Snap stock analysis on TipRanks)
Sure, investors are highly aware of its potential. They’ve priced in the AR catalyst, and then some. Still, even after its run-up over the past nine months, Snap stands to move towards higher price levels, thanks to the growth of its existing business carrying on in the coming years.
Future gains may come in more slowly than past ones. An unexpected hiccup (like another tech stock correction) could knock it down as well. Even so, investor sentiment is not expected to make a big permanent shift anytime soon.
SNAP Stock and its Augmented Reality Catalyst
Now with over 500 million monthly active users, Snap is now much closer in size to the largest name in the space, Facebook (FB). Much like its larger rival, the company is “leveling up,” by pursuing opportunities in related fast-growing areas.
Namely, these opportunities are in the augmented reality device space. This catalyst may only be in its early stages. Nonetheless, after years of heavy investment, via research, development, and acquisitions, it may have gained an edge. Snap might be able to stand above not just Facebook, but other above major tech names like Apple (AAPL) as well.
Why is AR such a potential game-changer for Snap? It’s not merely a faddish technological innovation. It could also be a boon for its advertising-focused business model. Facilitating features like the ability to “try on” clothing virtually, AR may be the next frontier of digital advertising.
Again, investors are well aware of the possible game-changers on the horizon for Snap. Yet, even as its stock price more than reflects these booming prospects, shares may have more room to run.
Shares are Pricey, But Haven’t Topped Out
Investors who want exposure to SNAP stock and its AR catalyst have to pay up. There’s no way around it. Shares today are trading for 25x this year’s projected sales, and 305.5x this year’s projected earnings. One might say it is “priced for perfection.”
That phrase typically signals to investors to beware, as overexcitement could give way to disappointment and big stock price declines. That may not end up being the case here.
Mostly due to its continued high levels of growth, Snap could be different. Projections call for 48% revenue growth and 212.7% earnings growth in the coming year. Statements from the company have indicated that the company could post similar growth levels in the coming years.
Add in the potential for it to beat on analyst consensus, as it’s done for the past four quarters, and there may be more than enough in play to convince investors to pay up even more for this “story stock.”
What Analysts are Saying About SNAP Stock
According to TipRanks, SNAP stock has a consensus rating of Moderate Buy. Out of 27 analyst ratings, 20 rate it a Buy, 6 analysts rate it a Hold, and 1 analyst rates it a Sell.
As for price targets, the average analyst Snap price target is $77.71 per share, implying around 21.25% in upside from today’s prices. Analyst price targets range from a low of $42 per share, to a high of $100 per share.
Bottom Line: Despite its ‘Priced for Perfection’ Status, Expect Sentiment to Remain Bullish for Now
Snap shares may look pricey to valuation-conscious investors. However, while it’s by no means cheap, that doesn’t mean it’s set to sell-off.
Sure, if we see another across-the-board tech stock correction, shares could see a double-digit drop from today’s prices. On the other hand, as Snap continues to grow its user base and starts commercializing its AR technology, there is unlikely to be a permanent shift in investor sentiment with SNAP stock anytime soon.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.