What’s Happening With SNAP Stock?
Snap’s stock (NYSE:SNAP) price dropped by 19% in trading on August 5th following the company’s Q2 earnings report. This decline was triggered by a slight miss on revenue, Average Revenue Per User (ARPU), and EBITDA. The key question for investors is whether this drop makes SNAP stock a good buying opportunity. We believe it doesn’t.
At its current price of around $8, SNAP stock appears unattractive due to concerns over its high valuation. Our analysis, which compares Snap’s current valuation to its recent operating performance and financial health, suggests the company is not a compelling buy right now. We’ve evaluated Snap’s performance across key metrics—Growth, Profitability, Financial Stability, and Downturn Resilience—and found its overall operating and financial condition to be moderate.
That said, if you seek upside with lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative — having outperformed the S&P 500 and generated returns exceeding 91% since its inception. Separately, see – What’s Happening With JOBY Stock?
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How Does Snap’s Valuation Look vs. The S&P 500?
Going by what you pay per dollar of sales or profit, SNAP stock looks expensive compared to the broader market.
- Snap has a price-to-sales (P/S) ratio of 2.4 vs. a figure of 3.0 for the S&P 500
- Additionally, the company’s price-to-free cash flow (P/FCF) ratio is 33 compared to 20.5 for S&P 500
How Have Snap’s Revenues Grown Over Recent Years?
Snap’s Revenues have seen notable growth over recent years.
- Snap has seen its top line grow at an average rate of 9.4% over the last 3 years (vs. increase of 5.2% for S&P 500)
- Its revenues have grown to $5.6 Bil in the last 12 months.
- Also, its quarterly revenues grew 9% to $1.34 Bil in the most recent quarter from $1.24 Bil a year ago (vs. 4.2% improvement for S&P 500)
How Profitable Is Snap?
Snap’s profit margins are considerably worse than most companies in the Trefis coverage universe.
- Snap’s Operating Income over the last four quarters was $-654 Mil, which represents a very poor Operating Margin of -11.6% (vs. 18.4% for S&P 500)
- Snap’s Operating Cash Flow (OCF) over this period was $587 Mil, pointing to a poor OCF Margin of 10.4% (vs. 19.8% for S&P 500)
- For the last four-quarter period, Snap’s Net Income was $-546 Mil — indicating a very poor Net Income Margin of -9.7% (vs. 12.2% for S&P 500)
Does Snap Look Financially Stable?
Snap’s balance sheet looks strong.
- Snap’s Debt figure was $4.2 Bil at the end of the most recent quarter, while its market capitalization is $13 Bil. This implies a moderate Debt-to-Equity Ratio of 32% (vs. 23.6% for S&P 500). [Note: A low Debt-to-Equity Ratio is desirable]
- Cash (including cash equivalents) makes up $2.9 Bil of the $7.4 Bil in Total Assets for Snap. This yields a very strong Cash-to-Assets Ratio of 39% (vs. 6.7% for S&P 500)
How Resilient Is SNAP Stock During A Downturn?
SNAP stock has fared worse than the benchmark S&P 500 index during some of the recent downturns. While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.
Inflation Shock (2022)
- SNAP stock fell 90.7% from a high of $83.11 on 24 September 2021 to $7.76 on 21 October 2022, vs. a peak-to-trough decline of 25.4% for the S&P 500
- The stock is yet to recover to its pre-Crisis high
- The highest the stock has reached since then is 17.45 on 6 February 2024 and currently trades at around $8
COVID-19 Pandemic (2020)
- SNAP stock fell 56.5% from a high of $19.25 on 23 January 2020 to $8.37 on 18 March 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
- The stock fully recovered to its pre-Crisis peak by 1 June 2020
Putting All The Pieces Together: What It Means For SNAP Stock
In summary, Snap’s performance across the parameters detailed above are as follows:
- Growth: Strong
- Profitability: Extremely Weak
- Financial Stability: Strong
- Downturn Resilience: Very Weak
- Overall: Slightly Weak
Overall, we believe that SNAP stock is unattractive and not a good buy at its current price, primarily due to its weak performance across key metrics and a high valuation.
Surely, we could be wrong in our assessment. While some investors may be willing to pay the current value of 2.4 times revenue, we believe the risks are high. This is especially true when considering that Snap’s ad sales growth is in the single digits, trailing behind other tech companies that have recently reported strong advertising revenue.
Investing in a single stock, or a small handful, always carries significant risk. For comparison, a diversified portfolio like the Trefis High Quality (HQ) Portfolio, which holds 30 stocks, has a proven track record of outperforming the S&P 500 over the past four years. This outperformance with less risk demonstrates the benefits of a more diversified approach, which can offer a smoother, more reliable investment journey compared to the volatility of a single stock.
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