Is Snap Expensive At $23?

After a 118% rally from 23rd March, we believe Snap’s stock (NYSE:SNAP)  does not seem to have room to grow based on its valuation. Snap’s stock has rallied from $11 to $23 off the recent bottom compared to the S&P which moved 40%. The recovery was first seen after the Fed’s multi-billion dollar stimulus package which suppressed near-term survival anxiety. The stock saw a further rise after the virtual Snap Partner Summit on June 11, 2020 where the company announced multiple tech updates like Augmented reality, Minis, Bitmoji for games, Scan, and Local Lenses.  The rise in the stock price was also helped with the company announcing expansion of its games partnership with Zynga (NASDAQ:ZNGA). The company has further announced its first-ever “shoppable” original show: “The Drop,” focused on “exclusive streetwear collabs” from celebrities and designers where it will try to turn Snapchat viewers into buyers.

Snap’s stock is at an all time high currently after recovering from the drop in March due to the coronavirus outbreak becoming a pandemic. In reality, Snap’s revenue is expected to grow further despite the coronavirus crisis which reflects in its current market price, too.

Some of this rise over the last 2 years was helped by the 76% rise seen in Snap’s revenue from 2017 to 2019, while its losses declined from $3 billion in 2017 to $1 billion in 2019.

The company has seen a steady revenue rise over recent years, but its P/S multiple has slightly fallen. We believe the stock has not much room to grow after the recent rally as it has reached its all time high. Our dashboard ‘What Factors Drove 58% Change In Snap’s Stock Between 2017 And Now?‘ has the underlying numbers.

Snap’s P/S multiple changed from 21x in 2017 to 13x in 2019. While the company’s P/S is now 19x, there is a possible downside when the current P/S is compared to levels seen in the past years. P/S of 13x end of 2019 and 6x as late as 2018.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Despite the stay-at-home orders, reduced discretionary spending, which has adversely affected consumption as consumer focus on essentials, Snap’s revenue saw a 44% increase in Q1 2020. We believe Snap’s Q2 2020 results will clarify further growth to its revenue.

Further, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value.

While Snap’s stock has seems to have little room to grow, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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