Should You Pick SNAP Stock At $11?

Snap’s stock (NYSE: SNAP) was down 6% on Tuesday, November 12, after a media report emerged stating that the Trump administration is expected to attempt to halt a possible U.S. ban on TikTok next year. TikTok owner ByteDance was given a deadline of January 19, 2025 to find a new owner for its U.S. operations, outside of China, or face a ban. If TikTok were to be banned in the U.S., it would have been a positive for Snap, with less competition in the social media space.

Even if we were to look at a slightly longer term, SNAP stock has underperformed, with a 25% growth since January 2023 — rising from levels of $9 then to around $11 now — vs. an increase of about 57% for the S&P 500 index over this period. This 25% growth can be attributed to:

1. a 12% rise in the company’s P/S ratio to 3.4x now, versus 3.1x in 2022;
2. a 12% rise in the company’s revenue from $4.6 billion to $5.2 billion over the same period; and
3. a 0.1% reduction in its share count thanks to $1.2 billion in share repurchases.

How Are Snap’s Fundamentals?

Snap’s flagship product is the smartphone app Snapchat, which allows its users to communicate via ephemeral short videos and images. It earns revenue primarily via advertising in its Snap stories and via creative tools such as filters and lenses. It faces stiff competition from larger social media platforms.

Snap’s revenue growth over recent years has been driven by strong paid subscriber growth. Snapchat+, which was launched in 2022, has seen its member base growth to 12 million now. The number of daily active users (DAU) has gone up from 375 million in 2022 to 443 million now. However, the average revenue per user (ARPU) of $3.10 currently is slightly lower than $3.47 seen toward the end of 2022.

Snap’s operating margin has improved from -30.3% in 2022 to -19.5% in the last twelve months. The company has higher spending on both SG&A – 39% of revenue, and R&D – 34% of revenue. Still, on an adjusted basis, the company’s bottom line is positive.

Looking at the company’s balance sheet, it has debt of $4.2 billion and a cash balance of $3.2 billion. Snap’s debt to equity ratio stands at 22%, while its cash as a percentage of assets is around 42%, implying a good financial position.

Does SNAP Stock Have Any Room For Growth?

SNAP stock is down 34% this year, underperforming the broader markets, with the S&P 500 index up 26%. Even if we look at a slightly longer term, the changes in SNAP stock have been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -6% in 2021, -81% in 2022, and 89% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and an expected stay on the  TikTok ban, could SNAP face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months — or will it see a recovery? We think SNAP stock has a little room for growth. We estimate Snap’s valuation to be $13, over 10% above the current levels of $11. Our forecast is based on 4x trailing revenues, aligning with the stock’s average P/S ratio over the last four quarters.

While SNAP stock now looks like it has some room for growth, it is helpful to see how Snapchat’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 11/13/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.