Snap - Path To $100 Billion Underway, Upgrading To Buy (NYSE - SNAP) - Seeking Alpha

01/02/2021 Snap: Path To $100 Billion Underway, Upgrading To Buy (NYSE:SNAP) | Seeking Alpha
Long Ideas Tech
Snap: Path To $100 Billion Underway, Upgrading To

Buy
Dec. 31, 2020 12:20 AM ET | Snap Inc. (SNAP) | FB | 25 Comments | 13 Likes
MangoTree Analysis
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Summary
SNAP shares are trading ~$50/share, a market cap of ~$75 billion, making it one of the largest
publicly traded social media platforms out there.
SNAP's success of late has been astonishing, but well grounded. The company's stock has
skyrocketed off the back of both strong monetization and user growth, combined with multiple
expansion.
In order to succeed in digital advertising, you need a unique value proposition for advertisers.
SNAP has just that.
SNAP's biggest hurdle will be growing the platform's monetization outside of the lower
engagement Discover platform. SNAP already seems to be making inroads on this, particularly
with Stories ads. The question is, can monetization improve drastically enough to sustain
valuation?
I believe so, and that there is even more upside to this story. Upgrading from Hold to Buy, raising
PT from $37 to $75.
Snap's Incredible Move

Snap (NYSE:SNAP) has been one of the best performers in tech since the March market bottom.
The company's steadfast execution on both the user growth and user monetization front have been
impressive to say the least. This has led to a staggering increase in the stock's value.
https://seekingalpha.com/article/4396789-snap-path-to-100-billion-underway-upgrading-to-buy 1/22
Data by YCharts
The sixfold increase has been fundamentally justified, but the question remains: where do we go from
here?
I've covered Snap as a bull, a bear, and in between. At this point, with the narrative and fundamentals
where they are, it's hard not to be bullish. That said, I feel like that is already being priced into the
valuation. We'll work through the valuation dynamic later. Besides, let's not forget the reason for
Snap's massive turnaround: the Android refresh.
Android Refresh Spring-loads ARPU and User Growth

For those who are new to covering Snap, for the first couple of years after the company's IPO, they
were stuck in the mud trying to redesign and revamp their Snapchat product on the Android operating
system. The biggest drawback of using the app on Android was ridiculously high power
consumption/battery drain as well as glitchy performance. This led to a poor quality of performance
for Android users. This meant for the first couple of years post-IPO, Snap's focus was on polishing a
very poor-performing Android app. This meant that the company had to solely rely on its core
domestic iOS user base to generate any growth. This was problematic however, as iOS is the
primary operating system of the more developed Westernized world. At this point, growth in the
Western world was stagnating, as was evident by Snap's decelerating US and Europe DAU growth.
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Essentially, Snap was internally hard at work to update the Android platform, while riding an ever-
descending iOS and domestic wave. As the wave began to crash (user saturation in the West/iOS),
Snap's user growth slowed. As user growth slowed, network effects died off, and users on the iOS
side began leaving the platform. All of this snowballed into a perpetual decline story, which likely
spooked advertisers.
The key reason advertisers were spending on Snapchat was not it's in-depth analytics or targeting
tools (of which there were none really because the ad platform was so young), but the coveted
Generation Z user demographic over which Snapchat had so much reach. As these users left for
Instagram, Snapchat appeared to be slowly dying off in popularity, meaning its value proposition for
advertisers was dying off too. Combine this with the disruption of moving from sales-based ad selling
to real-time bidding, and you have a short-term disaster on your hands, monetization-wise.
(source)
The Snapback: All of this, at the time, made the stock a big short selling target, and set up some
very easy y/y comps. That said, the argument could be made that the valuation was still high for what
the Street regarded as a busted growth story. In addition, Snap (at least at this point in time) was
inconsistent about beating analyst expectations, even with comps as low as they were.
Over time however, Snap started to deliver. The fundamentals of the business were improving as
monetization expanded and the user base stabilized. And yet, short sellers stuck around, and the
stock was range-bound.
Eventually, the stock caught up to the fundamentals as management executed on both user growth
and monetization. A management team that previously seemed undisciplined and inexperienced,
righted their ship. All credit to them. That said, they have been riding the Android update and Covid
tailwinds for user growth. Monetization-wise, their transition to auction based sales has seemed fairly
fluid, and has enabled strong ARPU growth. The stock has certainly reflected this in its recent run.
While fundamentals have run-up, so has valuation.
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Data by YCharts
So, where does the company and the narrative go from here? Up, at least in this writer's view.
Big Brands Like Good Lighting

Back in June, in the very tense political climate, we saw something incredible happen. Facebook
(NASDAQ:FB), one of the largest advertising behemoths on the planet, saw serious backlash.
Facebook is no stranger to controversy. It has always seemed that they were fairly immune to
controversy. A controversy would come up, executives would testify before Congress and get scolded
by clueless congressmen who don't understand what Facebook really does. Then, the stock would
drop, #DeleteFacebook would trend among woke "activists" on Twitter (NYSE:TWTR) for a couple of
days. Then, when we saw that neither users nor advertisers really left the platform, everything would
go back to ho-hum. Rinse and repeat. At this point, trying to keep up with Facebook PR debacles has
been like trying to keep up with our growing deficit. This rinse and repeat cycle seemingly changed in
the summer, when Facebook came under fire from internet users over its "hate speech" policy. This
time was different.
(source)
The #StopHateForProfit movement quickly gained steam, with over 1,000 companies boycotting
advertising spend on the Facebook platform. At the time I theorized that this was nothing more than a
PR move from big brand advertisers to score social brownie points with young "woke" consumers.
Even if advertisers return to Facebook in full, the boycott reveals something big that the Street seems
to be missing.
These users that the advertisers were trying to appease are young, socially conscious users. This is
the exact demographic that Snapchat targets. This means that brands will be able to pull ad dollars
from a controversy-riddled (yet high ROI) platform like Facebook, and plop them down in Snapchat
while still appealing to that core demographic, and still putting their marketing budgets to use in
something that can generate a good amount of ROI.
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While the political buzz has died down, and many brands have likely moved ad spend back to
Facebook (it still is the most effective social ad solution after all), has Snap seen a benefit? Definitely.
Companies trying to score points with younger, more socially conscious consumers are more likely to
buy ads on the Snap Ad platform. And why wouldn't they? This is the exact demographic that will be
driving purchasing trends for years to come.
In addition, Snap has a unique non-intrusive strategy for appealing to both advertisers and users.
With Facebook and other social media platforms like Twitter, ads feel "in your face" and intrusive, with
the brand trying to cram as much data about their product in the smallest amount of space possible.
This inherently means the user will have a negative attitude towards ads. Snapchat turns this
dynamic on its head. With the surge in popularity of augmented reality (thanks in large part to
Snapchat), users can now have fun with ads. Sponsored AR filters on your Snapchat camera can
create a fun experience, while the brand also gets its advertising value. This removes the
intrusiveness of other platforms, while still maintaining a positive experience for the ad buyer. Yet
another reason that advertisers will likely move ad dollars to Snap over the long haul.
The Attention Story: Snapchat Vs. TV (Hint: Snapchat Wins)

Covid has been a major disruption factor for better or for worse in every industry on Earth. In the tech
world, this disruption has generally been for the better, as companies and consumers move online to
accommodate social distancing and lockdowns. Snap has been no exception.
As the virus spread, and the lockdowns followed, one of the biggest forms of media used by
advertisers, the television was massively disrupted. Movie studios slowed or even halted production,
cord-cutting trends accelerated as consumers looked to reduce expenses, and most importantly,
sports were mostly shut down. This meant that for a few months, there was no real reason to turn on
TV. Sure, there was the news, but even Twitter and Facebook have disrupted the way millions of
people get news. The lockdowns disrupted TV, and more importantly, TV advertisers. The TV
advertising market in the U.S. alone is worth ~$72 billion. This market is massive, and because of
Covid, was quickly being disrupted.
You see, the advertisers that were not scaling down budgets as a whole, were moving their budgets
towards where the eyeballs were. TV engagement crashed, but digital engagement skyrocketed.
Advertisers still needed to generate ROI, so brands that have used TV for years (if not decades)
started playing around with digital ads. What you have to understand is that within digital advertising,
there are numerous subsegments: social media, search, video, banner, etc. Social media is the
segment that Snapchat operates in, along with platforms like Twitter and Facebook. Social media has
been one of the faster growing segments of digital for two reasons: targeting and engagement. For
years now, Facebook has been the leader in social media advertising because it has had a massive
amount of targeting and engagement. Understand the Facebook use profile: Facebook owns three
billion plus user platforms (core Facebook, Instagram, WhatsApp) with a massive amount of
individual data on each of their users. Their spending habits, deepest thoughts, communications with
others, who they follow, etc. Facebook has all this, and trains targeting algorithms on their user data
to mine the best insights to sell to advertisers. In turn, Facebook is now one of the largest companies
on Earth. This could be in jeopardy long-term, but I'll save that for another article. What you need to
understand is that Facebook is the 500 pound gorilla in advertising.
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(source)
Facebook has been around the longest, has the best tools for advertisers, and is generally the most
reliable platform in social media for advertisers. This is why despite the loss of ad spend from the
aforementioned ad boycott, Facebook still managed to beat expectations handsomely. You might be
saying, ok, I get it. But this is a Snap article, why are we talking about Facebook?
I am using Facebook as an example to prove a larger overarching point. The transition from legacy
media-based advertising and to digital/social advertising is here. Generally speaking, social media
advertising is just better than offline advertising. Why? A few reasons: knowing demographics, tools,
ROI comprehension, data advantage/targeting, customizable/flexible budgeting, easy to build, hard to
"change the channel".
First of all, when you are buying an ad to run on the air during a commercial break in a TV show, you
have a general idea as to who the target of your ad is. The network might have a general idea about
who is watching the show, and advertisers might select specific ads to target during the show, but you
are still making an educated guess, taking a leap of faith so to speak. You are throwing darts at a dart
board with your eyes half shut. Ok, I'll stop with the analogies, but you get the point. Without knowing
your demographic there is a risk that your content just isn't going to land with the end viewer.
Second of all, social media advertising platforms have more tools to use to target your specific needs.
They have more tools, with greater precision, because they have an exponentially larger data set to
work with on the end customer. They have tools for customizing pinpoint demographics, interests,
what content you tend to engage with over others. When you have more data with more precision,
you can craft better tools around it.
Third, understanding how much return on your investment you got is much easier online than it is
offline. The reason is fairly simple, direct-to-consumer is almost non-existent offline, and it is
omnipresent online. It is very hard to gauge how well your ad performed in terms of generating raw
sales for your business when you are operating on an offline channel. Online, the direct-to-consumer
angle is easily measured. When you click on the ad and make a purchase from the app, you have a
reliable readout of how effective the ad was. Essentially, online advertising has more transparency
than offline.
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The next reason that digital is asserting its dominance over traditional media advertising is the data
advantage and targeting ability. On a social media platform, virtually everything is logged, stored, and
analyzed. Data and trend analysis is so much more in-depth online than it is on offline channels. You
can simply get better insights about your target audience online than you can offline. This enables
better and more accurate targeting of your ad placement online, versus throwing an ad against a wall
and hoping it sticks offline.
Customizable and flexible budgeting is a part of digital advertising that few fully appreciate. When you
want to buy airtime on local TV, you don't have the ability to buy $5 worth of airtime. What if you are a
small business trying to scale, and you need to market your product? You aren't going to spend
thousands of dollars if not more on airtime alone (never mind production costs, more on that later) to
reach an unknown demographic. It would be far more efficient to make targeted posts on Facebook
or Snapchat to drive a select audience to your business. Customizable and real-time bidding allows
you to nibble at ad placements, rather than be forced to take on a massive gamble on a TV spot. A
TV spot may make sense for a company with a fairly large marketing department, but not for a small
business trying to get off the ground and running.
The next big differentiating factor between online and offline ad sales is how little time it takes to build
out an ad. When you are making a TV ad, there is a much longer production process. You need
producers, a script, directors, lighting crew, etc just to build out a small ad run. With online ads, the
platform generally provides you with the tools to build your own unique ads and send them out to a
target demographic. It doesn't take a massive workforce to build out an advertising operation on the
web like it does offline.
And finally, there is what I call the "change the channel" factor. On TV, skipping ads is quite easy. At
the press of a button on your remote, you can easily change the channel on your TV to avoid ads.
While this isn't impossible with social media advertising, it is much harder to do, as many ads are
simply unskippable if you want to view content on the platform. This means the odds of your ad being
viewed by a user of the platform are even higher because people are unable to cheat their way out of
viewing the ad as easily.
For all of these reasons, I believe a long-term rotation will happen away from the $70+ billion TV ad
market and towards the fast-growing and high ROI social media advertising market. Covid was the
trigger for traditional marketers to test the waters on other platforms, now we have to wait and see
how much churn away from TV ads there is.
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Snap Map, Stories, Filters and Discover: The Monetization Roadmap

Now that we understand social is one of the most compelling advertising mediums, what would
positively differentiate Snapchat from the competition? Well, let's try to understand the current
monetization roadmap for Snapchat. There are three parts of the platform that I believe will be
lucrative for advertising over the long-term: the Snap Map, Stories, and Discover. Right now, Discover
seems to be one of the largest drivers of monetization on the Snapchat platform, while Stories and
Snap Map are yet to be monetized. Let's break each part of the monetization story down starting with
Discover:
Discover: The first part of the platform, and the one that has gained the most traction monetization-
wise to date has been Discover. Discover also happens to be the least engaged part of the platform.
You see, at the core of the Snapchat platform is the camera and the messaging. if you want to view a
friend's "story" you swipe towards the Discover page. On this page, there is sponsored content and
commercials. While Snap has seen improving engagement, I don't believe this is going to be the
avenue that leads to the big monetization boost longer-term.
(source)
The reason for the lack of monetization runway here is simple: nobody really cares. The core
functionality of Snapchat is to communicate with friends, not to view sponsored content on the
Discover page underneath your friends' stories. This is why as much as Snap may end up spending
on exclusive original content, it doesn't fit their platform and has a fairly short runway for
monetization. That said, it appears Snap's monetization strategy is built around Discover as of now.
In my view, over reliance on Discover will do more harm than good long-term for the monetization
trajectory.
Snap Map: The next part of the monetization story could be the most exciting yet untapped part. In
the Snapchat app, if you enable it, your precise location is displayed on what is called the Snap Map.
All of your friends who have their location turned on on their device have the Snap Map open. Right
now, this opportunity seems untapped.
(source)
Imagine the use case for a small business with Snap Map. Let's run a hypothetical. A teenager on
Snapchat is bored, and is looking for things to do. They open their Snap Map and see what their
friends are up to, and an ad pops up for a small pizza parlor a couple of blocks away. This interests
the teen so he/she books a table and has a pizza. It's as simple as that, and this is the most likely
angle small businesses will turn to for advertising on the platform. Using Snap Map as an inspiration
engine so to speak could be very beneficial for advertisers. The Snap Map monetization runway is
incredibly long, and is currently very under penetrated as a growth avenue. We'll talk more about
Snap Map when we get to the next segment, but keep it in the back of your mind for now.
Stories: The next avenue for monetization expansion is Stories. This is a more uniform format of
growth, not unique to Snapchat specifically. But this format is growing, and a rising tide lifts all boats.
Promoted stories or unskippable stories between the viewing of your friends' stories could present a
unique monetization opportunity. As a matter of fact, both Snap and Facebook are already moving in
on this opportunity. I would anticipate this to be a more steady ad product used by all kinds of
businesses ranging from mom-and-pops to big brands as the format gains more polish. The runway
here isn't massive and unique like Snap Map, but it is enticing.
Filters: And finally, we have to look at filters. While the user base uses filters to goof around and
make silly faces, the underlying trend is much more surprising than you may think. As I already
mentioned, in today's day and age, brands care quite a bit about their image among younger user
demographics. That's part of why we had the #StopHateforProfit movement with Facebook. Filters
are an inherently fun piece of technology that elevates the user's perspective. It creates feelings of
positive emotions when you layer an AR (augmented reality) experience over the real world. Brands
who are conscious of the value of their brand might create AR filters to associate positive
experiences between users and the product advertised. This is one of the few advertising offerings
ever that could leave the user emotionally higher than before they saw the ad. That said, building AR
ads could be cost-intensive, and until low-cost tools are given to smaller advertisers, broad scaled
small business rollout is unlikely. This means that while the runway is not short, it isn't long or
compelling at this point in time.
Snap's Holy Grail and Ultimate Challenge: SMB & International

Now that we understand the monetization runway, we need to address the comps. The elephant in
the social media advertising room is Facebook. For comparison, Facebook monetized at ~$42/DAU
annually in 2019. And considering that the bulk of Facebook's future growth is going to come from
ARPU expansion and not user growth, this number can go up. In comparison, I'm projecting
~$9.48/DAU in ARPU this year. So, how does Snap close this gap and monetize at Facebook levels?
They have to conquer two challenges in order to close this gap.
SMB: The first challenge Snap must conquer, is the small business challenge. As time goes on, small
businesses are going to realize how much they need to gain access to this young yet influential
demographic. The question is, how does Snap give the tools to small businesses to target the user
base? In my view, the two most likely formats that small businesses will use on Snapchat will be the
Stories format and the Snap Map. If Snap can make AR development tools more widely available to
smaller advertisers, then AR filters could become a reality too someday. Snap has already begun to
make their ad platform more compelling for small businesses by moving to an auction-based,
automated ad selling platform rather than employing a massive sales team. This is the first step of
many that Snap will need to take to expand to the critical small business segment. This is a very
large part of why Facebook has become so successful in monetizing its platform. Timeline ads have
greater a high-engagement, simple, and high-ROI way for small businesses to advertise. Without
SMBs, Snap simply can't replicate Facebook's success.
International: The other component of Snap's monetization strategy is expanding their international
presence closer to their domestic presence. This is something that Facebook has been able to do,
with their international user base being monetized somewhat close to the rate of the domestic user
base. With Snapchat, it's going to take two things: time and execution. Rome wasn't built in a day,
and neither will Snapchat's international ad business. It's going to take time for Snap to scale up their
international presence, but they're going to need to execute to get to Facebook levels.
Huge Market To Attack

With all these advancements taken into consideration, we need to understand the market opportunity
for Snap. Snap has been attacking one of the largest markets on the planet, the social media
advertising market. In order to understand how big of an opportunity Snap has, we have to
understand the size of the addressable market. In social media advertising, this market is massive,
and quickly growing. Social media advertising can be divided between mobile and desktop. Snapchat
is a mobile platform, so we have to exclude desktop spend from the overall market.
(source)
Based on these numbers, Snap has currently captured ~2.5% of the mobile social media advertising
market. If Snap can properly execute in making good offerings to brands, direct-to-consumer, and
SMB advertising, I can see a long-term target market share of ~10-15%. Keep in perspective, for
2025 I'm projecting revenues in the neighborhood of ~$9.3 billion in 2025, which is a ~8.2% market
share. Considering the fairly small number of players in this space, Snap has a lot of market share
upside potential.
Optionality: Gaming/AR/Commerce Etc.

There is a feature of optionality to the story with Snap. Many who have followed this stock are aware
of the Spectacles debacle. Snap's seemingly failed attempt at creating camera glasses has been the
most evident attempt of diversification away from ads. That said, more fruitful attempts at
diversification could play out in the coming years. Namely, augmented reality related gaming
experiences within the Snapchat app, as well as an eCommerce platform. Let's not forget, when
Snap saw high-levels of executive turnover a few years back, one of the key additions was long time
Amazon veteran Tim Stone to the CFO role. So, leveraging the Snapchat platform for eCommerce is
definitely not out of the picture long-term.
More likely however is a push from Snapchat to bring gaming closer towards the forefront of the
platform's experience. This could turn Snapchat into the American equivalent of Tencent
(OTCPK:TCEHY). Keep in mind, Tencent is valued at ~$680 billion, and at its core is a social
media/gaming platform, with its tentacles invested in other places as well. Snapchat following the
lucrative Tencent model could set it up for tremendous upside.
Finally, there is augmented reality technology itself. Could Snap utilize its pole position in AR
technology to make a big hardware/software push? That could unlock a tremendous amount of
upside as well. Keep this optionality in mind when we discuss my valuation of the stock.
The Path To $100 Billion Plus

As of the time of writing, Snap is trading at ~$50/share for a ~$75 billion market cap. If you look at it
on 2021 or even 2022 numbers, the stock looks quite rich to say the least. The question is, can Snap
grow into this valuation over time, or an even greater valuation? In my view, the answer is a
resounding yes.
The model I base my price target on goes out to 2030, a decade from now when Snap is likely
reaching its maturity as a both a platform and as a company. By 2030, the company is likely
witnessing slowing user growth, and monetization of the platform is near its peak. The premise of my
model is answering the following question: What is Snap worth in 2030, and what will it be worth in a
year's time? Let's take a look at my expectations for Snap in 2030.
(source)
Starting with user growth, I anticipate Snapchat scales from its current standing of 249 million DAUs
(end of Q3) to 469 million DAUs, a growth of 220 million users. This growth will be mostly fueled by
Android and emerging markets expansion over the coming years. Currently Facebook's ratio of
international users to domestic users is 8:1. Right now, Snapchat is at a ratio of roughly 2:1. As you
can see, if Snap is going to scale user growth, it has to come from international, where the main
mobile operating system is Android. In 2021 however, I would note that I anticipate Snap to
experience a drastic deceleration in user growth as the global lockdowns ease and users return to
somewhat of a normal life. This is part of why I am below the Street on my 2021 expectations. This
assumes that over the course of the next decade, users will grow by ~88%.
The more important part of the growth story is ARPU. By 2030, I predict Snap will hit $39.97/DAU in
ARPU. Keep in mind, this is still short of Facebook's 2019 monetization level of ~$42/user. As Snap
expands its product portfolio and targeting offerings, anticipate continued monetization improvement.
Also, note that Snapchat is still in the early innings of building out their audience network as a part of
the overall SnapKit tool. Audience network is part of what drove Facebook's ability to target users so
effectively for so long. Now, Facebook Audience Network has come under fire, and they are
shuttering. Snap's expansion into using Snap Ads cross platform could be a key long-term revenue
generator for the company that enables this staggering ARPU growth that I'm projecting.
With these two numbers in mind, what will Snap's revenue be in 2030? Based on these two input
assumptions, I'm projecting Snap scales to a revenue of $18.733 billion. Keeping in mind that 10-15%
social media advertising market share figure previously discussed, Snap is in that ballpark. And that
is assuming that the social media advertising market stops growing after 2025. Obviously, social
media advertising will continue to grow, and as long as Snap continues to execute, there is no reason
they can't continue to take share.
Now, let's talk margins. Margins are incredibly important, especially for high-growth stories. The
reason is, eventually the company has to become profitable. When it comes to gross margins, the
key expense Snap incurs relates to infrastructure costs. You see, other platforms may build out their
own in-house cloud infrastructure, but Snapchat outsources, tying themselves up for years. As long
as revenue per user continues to scale up, then the gross margin profile will too scale with it. For this
reason, I'm projecting that Snap can get to Facebook type of gross margins at ~82.8% in 2030.
Operating margins wise, the only good comp in this space to think about is Facebook. Right now
they're looking at ~35% operating margins. I expect Snap can hit ~54.4% operating margins in 2030
when they're at scale. Why? Facebook's margins are so low because they have a massive
international workforce that they plan on growing, and massive costs related to content moderation.
This is creating a huge uplift in both SG&A and R&D which has led to operating margin contraction.
Snap simply doesn't moderate content on the platform like Facebook. They don't have to incur these
costs because the platform is just structured differently. As a result, I see continued OpEx growth, just
at a slowing rate as time goes on.
If we apply a fair tax rate of 25% to 2030 GAAP operating income, and assume a share count of
1.485 billion shares (per Snap's Q3 report), then operating leverage trends would dictate earnings
power of $5.18/share. Essentially, I'm projecting Snap scales to $5.18/share in earnings by 2030.
Now we have to determine a fair multiple.
For this valuation, I'm going to use an earnings multiple of 25x. Here's why: This implies a ~4%
earnings yield in 2030, versus the ~1% yield you would get on a ten year bond today. While rates are
probably going to move higher by 2030, and this gap will close, you have to understand the story.
Snap is a high margin tech stock, operating in a massive and continually growing industry. Keep in
mind, this model only takes 10-15% market share of the total social media pie. What if Snap can
scale into even greater share? Not to mention, Snapchat users are a coveted demographic. If
investors want exposure to younger demographics, Snap might be a name they look at. All of these
reasons and more, lead me to the 25x multiple. This means that by 2030, Snap should be valued at
$129.41/share. That's all well and good, but my price targets are based on 12-18 months out. So,
while the stock might be worth $129 in a decade, what really matters is what it's worth at the end of
next year. So, we have to discount back to YE2021 valuation.
So, what discount rate to use? My discount rate is WACC (weighted average cost of capital). The first
part of WACC is the cost of equity. Assuming a beta of 1.02, a risk free rate (10yr yield) of 0.936%,
and an equity risk premium of 4.97%, we come to a cost of equity of ~6.01%. Now, factoring in a cost
of debt of 4.04%, a tax rate of 25%, and a total debt load on Snap's balance sheet of $1.978 billion,
we come out to a weighted average cost of capital of 5.93%. This is our discount rate.
Discounting back our $129.41/share each year until we reach YE'2021 brings us to a valuation of
$74.64/share. Thus, my price target on shares of Snap is $75, reflecting an upside of ~50%. For this
reason, I am upgrading from Hold to Buy, and raising my PT from $37 to $75, entailing a market cap
of $100bln+.
(source)
Risks: Valuation, Fickle Users, Discover Reliance

As long-term holders of this stock know, there is no name without risk. Snap has been a name prone
to risk since its IPO, and even with the execution we have already seen, there is still an element of
risk to investing in Snap. The first risk is the valuation. What if Snap doesn't execute on the
monetization or user growth fronts long-term? Well, there isn't much margin of safety when the stock
trades at ~23x next year's revenues. If things do not play out well, expect a massive and heavy
correction in the stock downward, because there is no room for error.
The next risk is the risk of churn within the user base. Those of us who have covered this stock for
years know just how fickle younger Snapchat users can be. We witnessed it with Instagram, when
Instagram copied several key features and took users away from Snap. While I believe that Snapchat
has differentiated itself enough (new filters, new parts of the page, greater ephemerality) there is still
the risk that another platform steals Snap's thunder. That said, I believe this risk has diminished
significantly. TikTok became a hit app months ago, and we saw no diminishment in the user base or
loyalty to the platform. Snapchat has carved out its own unique use case. I wouldn't expect significant
user churn with a wave of new hit apps. Snap has finally differentiated itself.
The final risk Snap faces is its reliance on the Discover platform, as I already mentioned. The
Discover platform has been Snap's oldest and most reliable form of advertising, but it isn't scalable.
It's basically big brands and promoted content being pushed in the face of users who are (for the
most part) uninterested. It isn't really scalable to small businesses, and is against the core of why
Snapchat users use the platform. If Snap can't pivot towards Stories, Snap Map, etc. for bringing in
advertisers, I would anticipate monetization upside to plateau.
Conclusion
In conclusion, Snap the company has never been stronger. The stock has also never been stronger.
This has led to incredible multiple expansion and valuation expansion. And yet, when you look at the
long-term trajectory of this company, I think we're just getting started. In my view, Snap's path to $100
billion+ is underway. This is merely the beginning.
(source)
Disclosure: I am/we are long SNAP. I wrote this article myself, and it expresses my own opinions. I am not receiving
compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned
in this article.
Additional disclosure: I am not a financial advisor. This is not financial advice. Please do not interpret anything that I say here as
financial advice. Do your own due diligence before initiating a position in any of the aforementioned securities.
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13 Likes 25 Comments
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Comments (25) Newest
skiselev81 13 Jan. 2021

Comments (210)
Have people completely gone out of their minds in this bubble world? You can’t tell me what will happen in
this market tomorrow, yet you’re creating valuation models based on phantom 2030 numbers? By then, the
whole world will be a completely different place. Quite amazing to say the least. Let’s be real here: it is
JUST AN APP!! Nothing more. Today teens love it, tomorrow they don’t. And you’re saying this worthless
app, that has ZERO competitive advantage and zero barriers to entry is worth 100 BILLION today? Yea,
now we’ve seen it all in our 20 years in capital markets. This is as bad as 99 at this point, if not worse. And
that’s the end of that story.
Reply Like (1)
vote4weber 12 Jan. 2021

Comments (1.83K)
Will all of the people who no longer have Parler move to SNAP. Seems like the right move if you want to
keep your content hidden from “the censors”....plus SNAP is eventually going to have 200 million more
users in India. India has a population of 1.3 Billion and 65% of those people are 35 years and younger,
50% are younger than 25. Long SNAP
Reply Like (2)
MikeFromNZ 03 Jan. 2021
Marketplace
Comments (1.29K)
Thanks for the article!
Reply Like
fydo 03 Jan. 2021

Comments (1.69K)
An over-analysis...and 2030?..the Human Race may have nuked itself to death by then, or--at the very
least, I doubt this 11-yr. Bull will become a 22-yr. Bull. Biggest fault of all in this multi-faceted analysis: the
REAL growth impact of COVID for SNAP eye-balls & advertisers. With 2021 vaccinations, school back in,
etc...this once-only SNAP impetus slowly dies. Lots of thought in this major SNAP projection, of course..but
the future is seldom predicted accurately.
Reply Like (3)
outshine1 12 Jan. 2021

Comments (18)
@fydo snap has the next demographic gen z and will be target of advertisers. These users are not
on Facebook. Biggest competition is Tik Tok and Instagram. Maybe Snap wins maybe not.
Reply Like
BigEarn 31 Dec. 2020

Comments (1.17K)
Promoting 100 billion valuation with no profits, ever increasing expenses and competition, and government
regulation coming is just irresponsible. This article reads like a fanboy chasing momentum. Which is never
a good thing. It also assumes Snap is somehow immune to the same privacy concerns governments have
with all other social media offerings and that would be a very bad assumption. Especially when you
consider Snap's primary demographic. IMO that makes Snap an even greater risk than Facebook. What
happens when the US takes a look at all the porn on Snap and the fact the bulk of its users are teens? At
least FB has a plan for removing that sort of content from its platform in a timely fashion. Snap, to my
knowledge, has no such plan. Not to mention, TikTok has stolen all momentum from Snap and has left
them basically as a booty call app. Not good for future ad dollars. Again, I think these pro-SNAP articles
are written like a fanboy overplaying Snap's potential and not considering any of the downside risks. It's
going on 4 years since the ipo and each year Snap's profit projections get pushed out. At what point, are
analysts going to call for a wait and see approach to Snap's "potential"?
Reply Like (2)
fredpower89 31 Dec. 2020
Comments (200)
@BigEarn remember when you said it was a sell at 6$ a few years ago? Close to a ten bagger
since then
Reply Like (5)

Comments (1.83K)
@BigEarn-Tik Tok is banned in India. SNAP is growing at 150% year there.
Reply Like
lovetoinvest 31 Dec. 2020

Comments (34)
Wouldn’t SNAP be a good acquisition even if the assumptions don’t pan out? Remember the scramble for
tic tok?
Reply Like (1)
jasphoto 31 Dec. 2020

Comments (218)
This article makes me wanna buy Facebook
Reply Like (2)
kcshetty 31 Dec. 2020
Marketplace
Comments (3)
this author wrote a short on SNAP in June, when the stock was much lower; so when did he/she go to
hold?
Reply Like
sp987 31 Dec. 2020

Comments (59)
Where are the profits? A few cents EPS at best on a $50 stock?
Even if they grow revenues 30% per year, it won't be good enough
Reply Like (2)
HardytheTrader 31 Dec. 2020
Premium
Comments (1.69K)
Way too bullish assumptions. $SNAP is platform barely attracts new users anymore. This should provide a
ceiling for how far monetization goes. Fundamentals have been strong recently, but its valued like a
predictable high-margin SaaS stock which it is not. I think its a hold at best (edited)
Reply Like (2)

Comments (1.83K)
@HardytheTrader-SNAP is growing at 150% per year in India where there are about 600 million
people under the age of 25. And Tik Tok is banned there.
Reply Like
Starship53 15 Jan. 2021
Premium
Comments (113)
@Danimal111 why has snap suddenly turned direction it had been going up steadily but in two
days it has given up all gains
Reply Like
DavidsonJ 19 Jan. 2021

Comments (83)
@vote4weber
Yeah but they don't have any money.
Reply Like
Danimal111 31 Dec. 2020

Comments (1)
As someone who is 26, an age of which the platform users rarely are. Don’t do it.
No one uses it anymore. Instagram and tiktok is where it’s at. Unsure if they disclose average user time
spent, but I’m pretty sure that if anyone gets on snap at this point, is doing it because they’re constantly
bombarded with notifications
Reply Like (2)
i_orion 31 Dec. 2020

Comments (769)
@Danimal111 SNAP has become the goto app for covert booty-calls and sexting and it ain’t going
away anytime soon
Reply Like (3)

Comments (1.83K)
@i_orion-it’s also tied as the most used app by teenagers according to the annual teen survey by
Piper Jaffray
Reply Like (1)
Vlmed 31 Dec. 2020

Comments (1.51K)
Snap vs Instagram. Which one do the young people prefer? To be honest, I dislike both of them. Both are
very shady. Their strength is in the user base, but.... better players might come up. I do not see any moat in
any of them, other than the user base.
Reply Like (1)
St0nks 31 Dec. 2020

Comments (87)
@Vlmed Instagram for sure, id pick FB over Snap
Reply Like (2)
fredpower89 31 Dec. 2020

Comments (200)
@Vlmed I’m 31. Use snap almost everyday and have never downloaded Instagram. It’s the
humbleness of snap I prefer. Facebook often promotes the things with the most likes, meaning it
shows off very cheesy and generic post the most. I don’t understand the point of Instagram. You
can already post pictures on Facebook, Twitter, and Snap. Why do I need an app that specializes in
pictures?
Reply Like
milkyway007 31 Dec. 2020

Comments (386)
Still ❤ FB, but get couple shares of SNAP , let it grow 🌳
Reply Like
brentgrab 31 Dec. 2020

Comments (38)
I bought in at the exact bottom day. If only I bough 10x more of what I did haha. What a great run it’s been!
Reply Like (4)
goodfellasfinancial 31 Dec. 2020

Comments (1.24K)
@brentgrab and I sold at 53.42 I believe just yesterday. Great run, but I'm a dinosaur. I cant get
behind these guys
Reply Like (2)

Snap - Path To $100 Billion Underway, Upgrading To Buy (NYSE - SNAP) - Seeking Alpha

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01/02/2021 Snap: Path To $100 Billion Underway, Upgrading To Buy (NYSE:SNAP) | Seeking Alpha

Long Ideas Tech

Snap: Path To $100 Billion Underway, Upgrading To

Snap's Incredible Move

Android Refresh Spring-loads ARPU and User Growth

Big Brands Like Good Lighting

The Attention Story: Snapchat Vs. TV (Hint: Snapchat Wins)

Snap Map, Stories, Filters and Discover: The Monetization Roadmap

Snap's Holy Grail and Ultimate Challenge: SMB & International

Huge Market To Attack

Optionality: Gaming/AR/Commerce Etc.

The Path To $100 Billion Plus

Risks: Valuation, Fickle Users, Discover Reliance

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Comments (25) Newest

skiselev81 13 Jan. 2021

Reply Like (1)

vote4weber 12 Jan. 2021

Reply Like (2)

MikeFromNZ 03 Jan. 2021

Thanks for the article!

fydo 03 Jan. 2021

Reply Like (3)

outshine1 12 Jan. 2021

BigEarn 31 Dec. 2020

Reply Like (2)

fredpower89 31 Dec. 2020

Reply Like (5)

vote4weber 12 Jan. 2021

@BigEarn-Tik Tok is banned in India. SNAP is growing at 150% year there.

lovetoinvest 31 Dec. 2020

Reply Like (1)

jasphoto 31 Dec. 2020

This article makes me wanna buy Facebook

Reply Like (2)

kcshetty 31 Dec. 2020

sp987 31 Dec. 2020

Reply Like (2)

HardytheTrader 31 Dec. 2020

Reply Like (2)

vote4weber 12 Jan. 2021

Starship53 15 Jan. 2021

DavidsonJ 19 Jan. 2021

Yeah but they don't have any money.

Danimal111 31 Dec. 2020

Reply Like (2)

i_orion 31 Dec. 2020

Reply Like (3)

vote4weber 12 Jan. 2021

Reply Like (1)

Vlmed 31 Dec. 2020

Reply Like (1)

St0nks 31 Dec. 2020

@Vlmed Instagram for sure, id pick FB over Snap

Reply Like (2)

fredpower89 31 Dec. 2020

milkyway007 31 Dec. 2020

Still ❤ FB, but get couple shares of SNAP , let it grow 🌳

brentgrab 31 Dec. 2020

Reply Like (4)

goodfellasfinancial 31 Dec. 2020

Reply Like (2)