- Snapchat is still over 40% lower than recent highs.
- The company reported solid growth in the latest quarter but guided for material deceleration as it works through the latest iOS changes.
- Snapchat is generating cash flow and has over $3 billion in cash on its balance sheet.
- I rate the stock a buy with 50% upside over the next 12 months.
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Snapchat (NYSE:SNAP) has seen its stock hit first by a poor earnings report, and second by the broad tech sector correction. The stock was trading at rich valuations in light of the new outlook, but now the stock is offering compelling value for what appears to be a worthy challenger to the likes of Facebook and Instagram. SNAP is close to achieving profitability and is already generating positive cash flow to go along with its strong balance sheet. I can see the stock trading up 50% over the next 12 months as it works through its recent struggles.
SNAP Stock Price
SNAP tumbled after its last earnings report and has fallen a bit more ever since.
I could see the argument that some sort of price correction was necessary, but the current stock price of just over $46 per share offers a reasonable entry point for long-term investors.
Why Did Snap Stock Drop?
What caused the huge decline? It does not appear to be the reported numbers, as SNAP reported solid top-line growth highlighted by 60% growth in North America.
The problem wasn’t necessarily the reported financials - instead, it was SNAP’s guidance for next quarter revenues of between $1,165 million and $1,205 million, representing only 33% growth at the high end. SNAP management attributed the steep deceleration to Apple’s (AAPL) new data privacy changes, which negatively impacted the perceived ROI on its advertisements. I expect SNAP to require some time to work through the new changes - though to be clear, I expect the struggles to be temporary as SNAP remains a highly relevant social networking site today.
What Is SNAP Stock's Target Price?
The average price target is just under $74 per share, representing 60% upside. Even the lowest price target represents a double-digit upside.
It is no surprise that Wall Street analysts have an average bullish rating of 4.34 out of 5.
SNAP Stock Forecast 2022
Consensus estimates call for a rebound in 2022, with 40% projected top-line growth.
Consensus estimates look reasonable as they factor in material deceleration in growth rates, though clearly there is some uncertainty as to the exact timing of when SNAP will rebound from the data privacy changes.
Is SNAP Stock A Buy, Sell, or Hold?
In my view, the 13x forward sales multiple is a reasonable price to pay for what has become a top-tier social networking play. Why do I consider SNAP to be top tier? It all boils down to one metric: daily active users (‘DAUs’). SNAP saw DAUs grow by 23% year over year, or 4.4% sequentially.
That was significantly better than the modest sequential growth at Meta Platforms (FB) and sequential decline at Pinterest (PINS). SNAP’s ability to sustain solid DAUs growth suggests that there are no underlying problems in its social networking platform. SNAP still has a low average revenue per user (‘ARPU’) at just over $8 for North American users.
While I do not expect SNAP to fully close the gap with FB, I note that there is considerable upside to the $52 ARPU seen at FB.
Further, SNAP has reached an inflection point in profitability, as it is profitable on a non-GAAP basis and generating modestly positive free cash flow.
Sure, SNAP is still not profitable on a GAAP basis, meaning that there is still quite a bit of ongoing dilution.
The positive cash flow generation plus the $3.4 billion of cash on the balance sheet help lower the risk profile and provide justification for stronger multiples. Longer term, I can see net margins hovering around 30%. As of recent prices, SNAP is trading at a price-to-earnings growth ratio (‘PEG’) of just over 1x, which appears too conservative. I could see SNAP trading up to a PEG ratio of around 1.5x, representing around 50% upside over the next 12 months. Key risks include uncertainty with regard to the timing of any recovery, so investors should brace for volatility. Further, while SNAP is currently growing at a strong pace relative to FB, there is no guarantee that SNAP can sustain its relevance with newer generations or even its current user base. SNAP does not have the same cash flow generation of FB, meaning that it might not be able to compete dollar-for-dollar on the same playing field. The current stock price offers a compelling risk-reward proposition in light of the strong forward growth rates. I rate shares a buy.
This article was written by
Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.Julian is the leader of the investing group Best Of Breed Growth Stocks where he only shares positions in stocks which have a large probability of delivering large alpha relative to the S&P 500. He also combines growth-oriented principles with strict valuation hurdles to add an additional layer to the conventional margin of safety. Features include: exclusive access to Julian's highest conviction picks, full stock research reports, real-time trade alerts, macro market analysis, individual industry reports, a filtered watchlist, and community chat with access to Julian 24/7. Learn more.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of FB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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