The COVID-19 pandemic-driven stay-at-home and social distancing regimes forced some people to turn to social media platforms for entertainment and to connect with friends and family online. As a result, social media company Snap Inc. (SNAP) has benefited immensely, with increased traffic and ads on its platforms over the past year.
SNAP is a camera company that allows users to communicate through short videos and images known as a “Snap” under its flagship product, Snapchat.
The stock garnered strong momentum after the company posted a better-than-expected fourth quarter earnings report in the first week of February and held its first Investor Day Event later that month. The stock has advanced 19.9% so far this year.
Let’s take a closer look at the factors that could influence SNAP’s performance going forward:
Favorable Management Outlook
SNAP secured major investor attention after the company held its 2021 Investor Day on February 23 At the event, executives outlined a vision for how SNAP will boost its audience while maintaining user privacy and trust. Management believes that the company still has room to expand beyond its increased popularity during the pandemic. During the pandemic, advertisers increasingly sought to tap SNAP’s augmented reality tools, which lets people try on products virtually. According to Senior Product Director, Peter Sellis, SNAP is “in a position to drive multiple years of 50%-plus revenue growth.” The stock surged as much as 15% following the management commentary and eventually hit its 52-week high of $73.59 the following day.
Robust Financials
In the fourth quarter that ended December 31, 2020, SNAP’s revenue jumped 62% year-over-year to $911 million, marking its strongest quarterly growth in three years. SNAP’s daily active users (DAUs) rose 22% year-over-year to 265 million, representing a 33% rise in average revenue per user (ARPU) to $3.44, its strongest growth in five quarters. The company attributed the rise to the expansion of its ecosystem with new Discover videos, AR lenses, and in-app games, and its rising pricing power in online ads. However, SNAP reported a loss of $0.08 per share, compared to its year-ago loss of $0.17 per share.
Institutional Disinvestment
Asset management firm ARK Investment Management, which is led by well-known growth investor Cathie Wood, has been the talk of the Street lately due to its suite of actively managed exchange-traded funds (ETFs) that have been delivering market beating returns over the past few years. In the last week of February, the investment group sold 1.2 million shares of SNAP under its flagship fund, ARK Innovation ETF (ARKK), thereby exiting all its holdings in the stock.
Stretched Valuations
In terms of forward p/e, SNAP is currently trading at 431.01x, 2,043.2% higher than the industry average 20.11x. SNAP is trading well above the industry average in terms of trailing-12-month p/s also (37.46x versus 1.85x).
In terms of forward price/cash flow, SNAP’s 292.89x is significantly higher than the industry average 10.11x.
POWR Ratings Indicate Bleak Prospects
SNAP has an overall rating of F, which translates to Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, SNAP has a Momentum Grade of B, in line with its recent price rally.
However, SNAP has a Value Grade of D, consistent with its significantly higher-than-industry valuation. SNAP also has a grade of D for Stability, indicating that the stock is more volatile compared to its industry peers. Of 68-stocks in the Internet industry, SNAP is ranked #64.
Beyond what I stated above, we also have given SNAP grades for Growth, Sentiment, and Quality. Get all the SNAP ratings here.
Better than SNAP: Click here to access top-rated stocks in the same industry.
Bottom Line
After its stellar performance in the past year, SNAP management believes it’s on track for several years of 50% plus revenue growth by better monetizing its platform through its self-serve advertising ecosystem. Over the past few years, SNAP has improved its self-serve platform significantly (through Snap ads manager) and shifted to self-serve ads from managed ads. Additionally, the company is currently building on its investments in augmented reality, mapping, and content to drive its growth.
However, after all these years, SNAP has not been able to translate its massive base into profitability. In fact, the company is still generating negative free cash flows. The stock has surged so far this year solely on management’s optimism. But there is no clarity on the number of years the revenue growth will continue or on when will SNAP start making profits. Hence, we believe, SNAP has become largely overvalued and investors should avoid betting on it now.
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SNAP shares were trading at $57.71 per share on Thursday afternoon, down $2.31 (-3.85%). Year-to-date, SNAP has gained 15.26%, versus a 0.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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