Should Investors Consider Snap after the Recent Pullback?

Snap (SNAP) is a camera application company in the United States.

The company has a flagship product that enables users to communicate through short videos and images. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)

Earnings Miss and Drawdown

Snap’s stock slumped by 30% on October 21, after it released and missed its Q3 GAAP earnings estimates. The company’s revenue ($1.07 billion) didn’t match expectations primarily due to Apple’s (AAPL) new privacy policy regarding the tracking of consumer behavior.

Data acquisitions are key for tech companies to run efficient business models; I’d almost say it’s the sector’s key driver. In addition, Snap remains a single product company in a highly competitive space, and the sharp drawdown communicates investors’ awareness of this very risk.

However, the company’s CEO, Evan Spiegal, remains optimistic about the future. According to Spiegel, “We’re now operating at the scale necessary to navigate significant headwinds, including changes to the iOS platform that impact the way advertising is targeted, measured, and optimized, as well as global supply chain issues and labor shortages impacting our partners.”

Valuation

Citigroup suggested earlier this month that the street is now more realistic on Snap’s sales figures, having trimmed 2022 sales forecasts by 10% on average. Citigroup has upgraded the stock to neutral as a consequence.

Price-to-sales and price-to-cash flow multiples are suitable for growth stock analysis. According to a peer analysis, both metrics are significantly higher than the sector median.

Another issue surrounds the company’s intangible assets. Of the $1.742 billion in intangible assets on Snap’s balance sheet, $1.484 billion consists of goodwill, indicating that acquisitions were made at significant premiums.

Momentum

By looking at Snap stock’s RSI (Relative Strength Index), it’s evident that the stock entered oversold territory (27.72) after its post-earnings drawdown. The RSI has since reverted to approximately 40 with only around 5% stock appreciation. This conveys that there hasn’t been as much of a dip-buying attitude from investors as one might have initially thought there would be.

Wall Street’s Take

According to 26 ratings by Wall Street analysts, the stock has a Strong Buy consensus rating, based on 20 Buys and six Holds assigned in the past three months. The average Snap price target of $75.88 implies 39.7% upside potential.

Concluding Thoughts

Snap stock suffered a severe drawdown after its latest earnings report. A pullback buy can’t be justified at this time as indicated by key metrics.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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