Snap (NYSE:SNAP) finished 2021 in the red. Furthermore, the past 90 days have seen its share price sell off meaningfully. I make the argument that right now, there's too much pessimism priced in, and not enough of its long-term prospects being given the benefit of the doubt.
More specifically, I highlight to readers, that by putting aside psychological considerations or market timing antics, purely from a valuation point of view, investors with some stamina are being offered a very favorable risk-reward profile.
Right now, investors are being offered Snap at the lowest valuation multiple over the past 15 months. Anyone that's even remotely considered Snap, right now, this is a really good price point to dip your toes in.
Investors Throw in the Towel
The past three months have been bloody for Snap. More specifically, it's difficult to imagine that in the past 70 days, Snap has seen its valuation get a haircut of approximately 40%.
Case in point, back in October, I wrote,
Investors are often worried about something. The company misses estimates ever so slightly and the share price sells off.
And as the share price goes down, investors start to build narratives and worries build. Then, financial media outlets further sell those fears to sell their story. Fear sells.
At the time, the stock had already fallen by 20%. And it's difficult to imagine that since that point, the stock has fallen by a further 25%:
- What this means in practice is that anyone invested in Snap in the past year is holding onto a losing stock.
- This is very important to understand. Because this frames the investor psychology facing Snap.
- This means that practically anyone reading this article more likely than not is holding onto a losing stock.
- And this means, that investors very much don't want anything to do with Snap. This is stock is a headache that investors want to forget.
- Snap is a stock that investors are just looking for an excuse to sell. A painful memory that is begging to be removed from memory.
With this setup in mind, here's what I believe is actually at play.
Revenue Growth Rates, Temporary Set Back
Everyone that's interested in Snap by now is firmly anchored to the fact that Q4 2021 is pointing towards mid-30s% growth rates. Not only is this revenue growth rate painfully below the same period a year ago, but it also points towards the lowest revenue growth rate in more than five quarters.
Consider the overall background here. Countless stocks have been seen as ''COVID winners''. Consequently, investors are only too quick to build narratives to justify the current underlying performance, or better said, underperformance, and push Snap into a ''COVID winner'' narrative is as good as any other narrative.
Meanwhile, there is some noise being made about privacy headwinds and the fact that the stock is down, thus, all this is taken together and becomes slightly too painful to be worthwhile thinking through in a rational and dispassionate manner when it comes to this investment's potential.
Back to Basics, What Does Snap Offer to Advertisers?
Think about it for a moment. Snap reaches 75% of 13- to 34-year-olds in many Western countries. We are talking about 500 million users. I ask readers the following question, what other platform is as singularly focused on this particular demographic as Snap?
I'm not talking about reaching huge numbers of any demographic, I'm talking about specifically, this young demographic?
Along these lines, what do advertisers crave? As you know, advertisers crave a huge audience of very targeted demographic, where advertisers can deploy a large amount of advertising dollars on a large scale.
And what do advertisers ask in return? A way to measure the success of their ad spend. And that's where Snap has misfired of late.
However, any reasonable mind would agree, this is a temporary setback. Snap will figure out a way to provide advertisers with the tools they need. Snap isn't a faddish company.
After all, we are talking about a company that's going to bring in more than $5 billion in revenues over the next twelve months. The only question we have is how quickly until it reaches $8 billion in revenues as a run rate?
Path to Profits Continues to Improve
I noted this in my previous article, and I believe that it's worthwhile noting again.
(Source: Snap Q3 2021 Press Release)
On any metric, Snap is rapidly improving. Most importantly, on a GAAP basis, including stock-based compensation, we can see that Snap went from a negative $200 million loss in Q3 2020 to a negative $72 million in its most recent quarter.
At this rate, it's not too difficult to imagine that by this time next year, Snap will already be reporting positive GAAP profitability.
Valuation -- Why This is Attractive
Snap is valued at 13x forward sales. Snap rarely gets priced this cheaply. In fact, any investor considering Snap at any point in the past 15 months has been willing to pay a higher multiple for Snap than it currently trades at.
It's not that Snap is in any danger of becoming obsolete. Indeed, the only uncertainty facing the stock is how fast will its topline grow? Will it grow at closer to 30% CAGR? Or perhaps even 40% CAGR? Or will Snap return to the high 40s% CAGR, as if nothing happened?
Obviously, right now, it's difficult to know the answer. But what I do know, is that paying 13x this year's revenues for a company that is rapidly moving towards positive GAAP profitability and clearly growing is a cheap valuation.
The Bottom Line
Snap has had a rare misfire, as it failed to provide advertisers with the necessary tools for them to adequately measure their ROI on an ad spend.
I believe that there's nothing structurally wrong with the platform. In fact, I believe that if you follow the user growth, you'll be reassured that the social media platform is clearly still growing, irrespective of what the share price may lead you to believe.
Presently, investors are being given an opportunity to enter this high growth name at the cheapest entry point in the past twelve months.
Whatever you decide, have a great 2022!