Snap’s Stock: Too Expensive At $67?

[Updated 03/02/2021] Snap Update

After rallying 298% since the end of 2019, Snap’s stock (NYSE:SNAP) has reached its near term potential. Snap is a camera and social media company which has developed a number of technological products and services, namely Snapchat, Spectacles, and Bitmoji. The stock grew from $17 at the end of 2019 to near $67 now, compared to the S&P 500 which has gained 20% since the end of 2019. The company has seen rising revenues and improving earnings over recent years. Our dashboard ‘Buy or Sell Snap’s Stock‘ has the underlying numbers.

During the Covid-19 crisis, Snap saw revenue rise by 46% in 2020 to $2.5 billion, while earnings per share improved to -$0.65 compared to -$0.75 in the previous year. Revenue and earnings were driven by continuous increase in Daily Active users.

We expect Snap‘s revenues to rise by 47% to $3.7 billion in 2021, increasing its revenue per share to $2.53 which coupled with the P/S multiple of 25.2x will lead to Snap’s valuation of around $64, which is close to its current market price.

[Updated 11/16/2020] Should You Invest In Snap Stock After Recent Gains?

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.

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.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which 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 FY 2022 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.

While Snap’s stock may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Facebook vs. Emergent Biosolutions shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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