For Growth Investors, Snap Stock Looks Too Cheap Here | Investing.com


In March 2017, Snap (NYSE:) held its initial public offering. Given Snap’s already-impressive reach in social media, the IPO was one of the most anticipated in years. Indeed, SNAP stock rallied nicely on its first day of trading, gaining 44% from its IPO price and closing at $24.48.

Five-plus years later, SNAP stock hasn’t moved. At the moment, it’s actually down about 1% from that first-day close. But the stock has taken quite the roller-coaster ride to get to this point.

For a number of reasons, investors should expect more volatility going forward. But they should also expect that the volatility might work in Snap’s favor. This is a company still growing nicely in an environment with an unprecedented number of challenges. At some point — though perhaps not until some semblance of normalcy returns — the market seems likely to again reward that growth.

The Roller-Coaster Ride For SNAP Stock

SNAP moved pretty much straight down after its first day of trading. By late 2018, it was trading below $5. The culprit was simple: Snap’s user base essentially stopped growing after an app redesign. With the company still completely unprofitable and dearly valued (its market capitalization, even at $5, was in the range of $7 billion), there seemed little reason to buy the stock.

But Snap righted the ship. User growth returned. Daily active users (DAUs) were 332 million in the first quarter of 2022, up 78% from the figure in Q3 2018 (a quarter in which the user base actually declined quarter-over-quarter). Revenue in 2018 was $1.2 billion, and analysts expect $5.5 billion this year.

The improvement was rewarded by a market increasingly willing to pay up for revenue growth. By September of last year, SNAP stock was above $80, and had risen more than 16x from the December 2018 bottom.

Of course, from there the bottom fell out, as it has for so many growth stocks. SNAP stock now has dropped 71% from those highs. It’s a decline that makes some sense, but perhaps not enough.

Why Snap Stock Has Plunged

In one sense, everything has gone wrong for Snap. As noted, investors have significantly re-priced both growth stocks and social media stocks.

For growth stocks, the problem seems to be valuation. SNAP stock seems no exception: at $80-plus it almost certainly was too expensive. That price suggested a market cap of $134 billion — or some 33x the company’s 2021 revenue. The EV/EBITDA (earnings before interest, taxes, depreciation and amortization) multiple cleared 200x — and Snap’s Adjusted EBITDA figure last year would have been negative including stock-based compensation.

Social media companies, and online advertising plays more generally, saw their own pressures. The move by Apple (NASDAQ:) to focus on privacy in its iOS ecosystem has upended the industry. Snap stock itself was downgraded by an analyst in January for precisely that reason; social media titan Facebook (NASDAQ:) will likely see a revenue impact of more than $10 billion this year from the new Apple policy.

Macro issues are a problem as well. Supply-chain issues have led to product shortages, which, in turn, pressure online advertising spend. Companies won’t spend up to promote products they can’t actually get into inventory. The Federal Reserve is raising rates to head off inflation, but that increases the risk of a recession in coming quarters.

An economic slowdown too would pressure online advertising spending. That doesn’t seem like good news for Snap, a company which literally never has dealt with a U.S. recession (the company was only founded in 2011).

From this perspective, everything is going wrong for Snap. And so it’s no surprise that SNAP stock has plunged — nor would it be a shock if the stock fell even further.

The Case For SNAP Stock

All that said, it’s worth taking a step back. In an environment where everything externally seems to be going wrong, Snap still is doing an awful lot right.

In , for instance, revenue increased 38% year-over-year. That was on top of 66% growth the prior year. Adjusted EBITDA turned positive; Snap generated free cash flow of more than $100 million just in the quarter.

User growth continued as well, with an 18% increase against Q1 2021, and 45% on a two-year basis.

It’s too simplistic to argue that if users increase, SNAP stock does — but there’s some truth to that claim. Social media platforms benefit enormously from scale. Incremental users add significant profit, because the incremental cost of revenue created by serving those users is not particularly high.

Admittedly, Snap isn’t quite Facebook in this regard: Snap generates gross margins of just 60%, against 80% for its far larger rival. Still, for Snap more users and more engagement will drive margin expansion and, thus, sharply higher free cash flow.

There’s another huge opportunity here: better monetizing users. Snap, still a relatively young company, has improved notably at attracting advertising revenue, but it still lags peers. Facebook generated $9.54 of ARPU (average revenue per user) in the first quarter. Even much-maligned Twitter (NYSE:), hardly a paragon of execution in recent years, did more than $5.

For Snap, the figure was just $3.20 — and less than $1 outside of North America and Europe. Yet, nearly half the company’s daily active users come from beyond those regions.

Taking The Long View

All told, there’s still an awful lot of growth left for Snap over time. If the company can combine user growth and better monetization, revenue is going to grow for many years to come. That growth, in turn, will boost operating margins. At some point on that trajectory, Snap will begin to generate significant, consistent free cash flow.

That’s essentially the bull case that led SNAP stock from $5 to $83 from late 2018 to mid-2021. Importantly, it’s a bull case that still remains intact. It’s not as if users are fleeing, or Snap is executing poorly.

There will be volatility along the way, particularly in a clearly nervous market, and $24 isn’t necessarily the short- or even mid-term bottom. But from a long-term perspective, it’s not crazy to see SNAP stock, at 50x this year’s EBITDA and 30x analyst estimates for 2023 adjusted net income, as inexpensive.

As long as growth continues, SNAP stock should be fine over the long haul. Amid all of the craziness in this market, it’s worth remembering that, at least for now, growth indeed continues.

Interested in finding your next great idea? InvestingPro+ gives you the chance to screen through 135K+ stocks to find the fastest growing or most undervalued stocks in the world, with professional data, tools, and insights. Learn More »



Source link