Snap’s Stock To Fall Below $9 Again?

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Snap (NYSE:SNAP) stock witnessed a sharp jump after the company reported its Q1 2020 results last week – regaining the ~$17 level seen at the beginning of the year. But we believe the company’s stock could potentially fall below $9 again over the coming months – an idea not too far-fetched given that it had touched a low of $7.89 barely a month ago. We estimate that Snap’s stock price could decline to levels of around $9 if its revenues fall by 15% vs FY’19, and its Price/Sales valuation multiple falls to levels of around 8x from 13.1x at the end of FY’19. This would likely happen if the economy slips into a recession, hurting demand for online advertising on its various products.  Below, we summarize a possible downside case for Snap.  Our dashboard How Low Can Snap Stock Go? discusses our 2020 expectations for the company under the downside scenario.

 

So what’s the likely trigger and timing to this downside?

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The global spread of Coronavirus has meant the companies are wary of spending cash on online advertising and want to focus more on the core expenses only. Snap’s Q1 2020 results have shown lower margins than in the same period of the previous year. We expect the revenues to be affected in Q2 2020 because the coronavirus impact started showing in March so the first 2 months were relatively unaffected.  

Specifically, we believe the full-year revenue expectations formed by the market as the coronavirus impact gets clearer may be closer to $1.5 billion – about 87.5% higher than its 2017 revenue of $0.8 billion, but 15% lower than the 2019 revenue of $1.7 billion. A separate dashboard shows key components of Snap’s revenues under our base case scenario.

There could be a knee-jerk reaction from investors which could potentially trigger another sell-off, and Snap’s P/S multiple is likely to shrink by about 38% from the current level of 12.9x to 8x. This would mean a double whammy of  15% lower revenue and 38% lower P/S multiple, translating into a Snap’s price drop of roughly 45%, to about $9 or lower. In fact, it would help to keep in mind that the company’s P/S multiple was 6x as recently as the end of 2018, and almost reached 7x in mid-March. So we can’t rule out a sharper decline to say $6.50 in the near future.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. That said, the actual recovery and its timing hinges on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

While Snap’s stock could fall to $9 or below due to lower revenue from online advertising, this could have a pronounced impact on peer Facebook too.

 

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