Snapchat: A Tech Stock to Avoid
Oh, snap! A picture says a thousand words, but the reality of what’s happening to the viral multimedia instant messaging application formerly known as Snapchat is an image we captured months ago. On May 17, 2022, Snap Inc. (NYSE:SNAP) was trading at $24.07 per share, and Seeking Alpha’s Quant Ratings dropped its rating to Sell, based upon its declining momentum, abysmal valuation, lack of profits, and a macro environment that has been stunting the growth of many companies. Growth without a concentration on profitability can be a recipe for disaster, as showcased in the factor grades below.
Many technology companies have been on the losing end of the markets, with technology being down more than 20% YTD relative to other sectors. And when we look at the tech sector and speculative technology that benefited most during the pandemic amid low inflation, low-interest rates, compared to the current high-inflationary environment, we’re seeing massive selloffs of spec tech and tech darlings like Netflix (NFLX) and Meta (META).
As businesses and consumers reevaluate spending, fears of monetary tightening, recession, and anticipation of more volatility are resulting in earnings nosedives like we’re seeing with SNAP’s latest 27% post-market decline. This highly volatile market should expose other companies that are performing poorly. And as the significant slowdown in ad spending and competition has taken a toll on the firm, SNAP’s CEO Evan Spiegel is attempting to remain optimistic.
“We are evolving our business and strategy to reaccelerate revenue growth, including innovating on our products, investing heavily in our direct response advertising business, and cultivating new sources of revenue to help diversify our top-line growth…While the continued growth of our community increases the long-term opportunity for our business, our financial results for Q2 do not reflect our ambition” –Spiegel.
Given that the company is not releasing guidance for Q3 and the challenging environment going forward, it’s time to snap back to reality and look at the overall picture for this company below, which showcases why the stock is a Strong Sell.
Snap Inc. (SNAP)
Quant Rating: Strong Sell
Market Capitalization: $25.45B
Quant Sector Ranking (as of 7/21): 233 out of 247
Quant Industry Ranking (as of 7/21): 54 out of 61
Analysts’ Downward Earnings Estimate Revisions: 29
A global camera app that instantly captures photos and videos to tell a story was founded in 2010 and is currently trading at its lowest valuation ever. Down 74% over the last year with post-market anticipation of it falling further since the release of its Q2 earnings, this company’s sharp decline from its 52-week high of $83.34 makes evident why this stock is at high risk of performing badly.
Not only does SNAP possess an F grade for valuation, but its Non-GAAP forward P/E ratio of 76.51x also is more than 344% higher than sector peers. Forward EV/Sales of 4.95x is 146.28% difference to the sector, and its bearish momentum showcases a tragic quarterly decline, significantly underperforming its sector median peers.
When you factor in SNAP’s diminishing revenue growth rate, it’s clear why the company is overvalued. Let us dive into the Q2 earnings that are headline news.
SNAP Stock Growth & Profitability
Snap was a unique, creative, and cool application allowing users to instantly video chat and send images using customized content, filters, geofilters, text, and emojis. But immense competition from rivals like TikTok, YouTube, and other social media platforms, along with the macro environment, has changed the trajectory of this company.
Since our May rating for the stock changed to Sell, the stock has declined nearly 40%. Although SNAP believes that advertising is moving in its direction, a slowdown in ad spending by the tech behemoths could be a massive blow to its business model. As fellow Seeking Alpha Marketplace Author Michael Wiggins De Oliveira writes, “If anything, we are getting increasing glimmers that the macro environment is plaguing advertising companies more significantly than we previously expected,” which could make it increasingly difficult for SNAP’s bottom line as it has emphasized procuring advertising dollars.
With characteristics historically associated with poor future stock performance, SNAP is not only overpriced compared to its Communications peers, it has been struggling to grow for a while. Announcing a new loss of $422M from its $152M one year ago, SNAP’s adjusted EBITDA also fell from the previous year’s $117M to $7M.
SNAP’s cash flow has declined year-over-year, with operating cash flow of $101M dropping to -$124M and free cash flow to -$147M from -$116M. And while the Q2 EPS loss of $0.02 beat consensus forecasts for a loss of 3 cents a share,
“Snap appears likely to face worse-than-expected ad-pricing pressure, driven by a pullback in spending as well as Apple’s privacy changes. The company’s view of 3Q revenue being about flat year-over-year suggests its headwinds aren’t likely to abate in the near term.” –Mandeep Singh, Bloomberg Intelligence Senior Technology Industry Analyst.
SNAP’s primary competitors are big social media names, including fast-growing TikTok. Although SNAP is ad-supported, they see a pullback in ad-supported dollars as their supporters also feel the effects of inflation and the macro environment. Can the company weather this environment, or is its downward momentum a sign of things to come? Either way, I am confident in the strong sell quant rating and would avoid buying this dip. Snap out of it!
Snap says, “Life’s more fun when you live in the moment!” Unfortunately, like many equities in this volatile market, this is one of those moments many companies do not wish to see; record outflows and loss of ad revenue and customers pose many concerns that indicate why stocks in this industry that are facing stark competition and lack profitability are at risk of continuing to perform badly. SNAP has a strong sell recommendation because it is experiencing substantial declines and has less than attractive profitability and momentum. SNAP is unattractive on many metrics with uncertain guidance for Q3, slowing growth rates, and trades at a premium.
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