In less than 4 hours, social media giant Snap (SNAP) is due to report its Q1 2022 earnings — and things are not looking good.
Tuesday’s hard copy of The Wall Street Journal warned that “obstacles are mounting against online-advertising giants” and observed that “Wall Street has taken on a notably cautious tone for the sector.”
On the one hand, overall advertising revenue from the “six major players” — not just Snap, but Amazon, Facebook, Google, Pinterest, and Twitter besides — is still expected to grow a brisk 19% year-over-year in Q1. On the other hand, though, 19% growth would be less than half the blistering 40% pace set in the year-ago quarter, and down 9 full points for the 28% growth seen in Q4 2021.
It also didn’t help that Jefferies analyst Brent Thill seemed to pile onto the Journal story, warning that after a probably good Q1, stocks dependent upon the sale of digital ads will face “very tough Q2 comps.” In anticipation of these troubles to come, Thill lowered his estimate of Snap’s fiscal 2022 revenues by 4%, and his earnings estimate by 16%, and cut his price target on Snap stock by 13%, to $52 a share.
Furthermore, according to Thill, investors “are skeptical of SNAP’s ability to achieve 50%+ LT rev growth.” And perhaps they well should be — 50% annual growth is amazing, and any company’s ability to maintain to maintain such a blistering pace over the long term would be surprising.
Nevertheless — and despite his price target cut — Thill remains of the opinion that investors should “buy” Snap stock. But why?
For one thing, at its current share price of less than $30 per share, Snap sells for a 43% discount to Thill’s assessment of the stock’s intrinsic value. For another, the stock’s price-to-sales multiple, although twice that of the Nasdaq at large, is below where Snap has traded “historically” — inasmuch has Snap has more often sold for three times what other Nasdaq stocks fetch.
Snap also has a chance to benefit from a positive catalyst when earnings come out tomorrow. As Thill explains, the top of Snap’s guidance range — 40% revenue growth in Q1 — looks conservative enough to beat, given that corporate ad spending was apparently in line with estimates in March, and even “very strong” in February. On balance, Thill is of the opinion that Snap will beat analyst forecasts for revenues in Q1.
That being said, the analyst does worry that Q2 won’t be so easy to beat. Snap is “facing its toughest comp in Q2 (+116% y/y rev growth vs. +66% y/y in Q1),” warns the analyst. If management decides to be conservative again when it gives guidance at the end of its Q1 report, it could well predict revenues below what Wall Street is expecting, leading to a selloff whether or not the Q1 numbers actually measure up.
Regardless, hopes springs eternal. In Thill’s view, after slowing significantly in Q2 (24% year over year growth), Snap’s growth will perk back up again in the second half of the year. For Q3, he forecasts 36% growth, and then 46% for Q4.
Should Snap sell off on weak guidance today, therefore, the analyst would view this as an opportunity to buy more Snap stock. (To watch Thill’s track record, click here)
Overall, the bulls are running for SNAP. The stock has 28 recent analyst reviews, with a 21 to 7 breakdown favoring the Buys over the Holds. Therefore, the message is clear: SNAP is a Strong Buy. The stock is priced at $29.49, and its $52.96 average price target suggests it has room to run ~79%. (See SNAP stock forecast on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.