Should You Invest In Snap Stock After Recent Gains?

by Trefis Team
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After a 280% rally from 23rd March, we believe there may be better places for your money than  Snap’s stock (NYSE:SNAP) at the present time based on its valuation. Snap’s stock has rallied from $11 to $40 off the recent bottom compared to the S&P which moved 60%. The stock has outperformed the market and was at a 52 week high in early November after Q3 results. For Q3 2020 Snap beat consensus for revenue and earnings as the company benefited from a continuous rise in the daily audience. In Q3 Daily Active Users increased 18% y-o-y to 249 million.

The company has seen a steady revenue rise over recent years, but its P/S multiple has fallen. We believe the stock does not have much room to grow after the recent rally as it has reached its all time high. Our dashboard What Factors Drove 176% Change In Snap’s Stock Between 2017 And Now? has the underlying numbers.

The 176% rise in SNAP stock price between 2017 to 2019 is justified by significant growth in revenue during those two years. Snap’s Revenue increased 108% from $0.8 billion in 2017 to $1.7 billion in2019. This effect was amplified by margins improving from -418% to -60% during this period. Revenue per share (RPS) went up from $0.71 to $1.25. Higher revenue and margins were driven by overall industry growth and innovative solutions.

During the same period, the P/S multiple fell from 21x in 2017 to 13x in 2019. This was because the rise in stock price was lower than the growth in earnings. The P/S jumped in 2020 following the outbreak of coronavirus pandemic as more and more people started using Snap for watching shows and Discover content. Currently the multiple stands at 32x.

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 consumers focus on essentials, Snap’s revenue saw a 52% increase in Q3 2020 to $678 million. Adjusted EBITDA improved to $56 million in Q3 2020, compared to $-42 million in the same period of the previous year.

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 become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. As per Snap’s valuation by Trefis, we have a price estimate of $40 per share for Snap’s stock, reflecting no more potential rise from its current level.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

See all Trefis Price Estimates and Download Trefis Data here

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