Many stocks have slipped in September. The S&P 500 has slid a total of 3.8% and the Nasdaq Composite has now fallen 5%, thanks to a rough day for the markets on Tuesday.
Some investors were spooked this week as the 10-year U.S. Treasury yield rose to as high as 1.558% yesterday, sparking a steep decline in stocks on Tuesday. Investors likely fear that higher bond yields may pull some money from stocks over to safer bond assets, weighing on stock prices in the near term.
Opportunist investors with a long-term investment horizon, however, can use market declines like these to add to their holdings, buying shares of great companies at lower prices. One fast-growing tech stock worth considering during this market sell-off is Snap (SNAP 4.71%). Shares of Snap tumbled 7% on Tuesday.
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Grabbing share of a $500 billion market
If there's one thing Facebook (META -1.12%) has taught investors over the last 10 years, it's that it's very easy to underestimate both the durability of a good social network and its long-term monetization potential.
Hundreds of billions of dollars are spent globally every year on digital advertising, and marketers are always on the hunt for the highest return on investment on their ad spend. An engaged user base on a social network, of course, is a great place to look for high-performing digital ads.
That's why investors should take Snap's massive market opportunity seriously. Sure, the company's price-to-sales ratio of 32 is quite a premium to pay for any company -- even for a growth stock like Snap.
But when investors consider that the company's $3.3 billion of annual revenue today is just a small slice of a worldwide digital advertising market that eMarketer estimates will command more than $500 billion of ad spend next year and $646 billion annually by 2024, it's easier to see why investors are so excited about this opportunity. The company is winning over investors as it's growing its top line at staggering rates in a massive market; trailing-12-month revenue is up 73% year over year.
Impressive user engagement
While the company's top-line growth and its market opportunity do a good job of articulating why Snap is a good way to bet on the half-trillion-dollar digital advertising market, there's arguably an even better reason to believe in Snap. The user engagement on the platform is extremely impressive.
Snapchat's daily active users rose 23% year over year to 293 million in the company's most recent quarter. This compares to Facebook's 12% year-over-year growth in unique daily active users across its portfolio of social networks, including Facebook, WhatsApp, Instagram, and Messenger.
Of course, Facebook has a much bigger user base, with 2.76 billion daily active users across its apps. But Snap is big enough to give the company a network effect, or a competitive advantage in which its global reach alone makes the platform "sticky" for users.
Profit potential
The final reason Snap is worth its hefty price tag of more than 30 times sales is its profit potential. Facebook has demonstrated that social networks can eventually command massive profit margins. The company currently has an operating margin of 43% and a net profit margin of more than 35%.
With Snap's business model looking like it's just as scalable as Facebook's, it wouldn't be surprising to eventually see Snap converting revenue dollars to profits just as efficiently.
While it's always possible that competition from the likes of Facebook and Twitter could prove more challenging than expected, it seems likely that Snap will prove to be a good investment over the long haul -- even in a competitive environment. Of course, investors should expect some volatility along the way.
