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Snap: Plenty of Growth Potential, but Still Speculative
Stock Analysis & Ideas

Snap: Plenty of Growth Potential, but Still Speculative

Snap Inc. (SNAP), originally named Snapchat Inc., is an American camera and social media company. The company offers and maintains a range of technological products, including Snapchat, Bitmoji, and Spectacles.

I am neutral on Snap because its significant growth potential and general Wall Street bullishness are offset by its lofty valuation and highly competitive industry. (See Analysts’ Top Stocks on TipRanks)

Strengths

Snap is known for developing the popular social media app Snapchat. It had 306 million daily active users in the third quarter, showing an improvement of 57% year-over-year. The company has seen at least 20% growth year-over-year for four consecutive quarters.

Snap has created a strong portfolio of businesses by making a number of smart acquisitions, including Vergence Labs, the company that developed Epiphany Eyewear. It also acquired Scan and Bitstrips, Obvious Engineering, and Vurb.

In 2016, the company acquired the martech company Flite and Israeli AR company Cimagine Media. This was followed by the acquisition of Zenly, the location-sharing app, and a joint venture with NBC Universal in 2017. In 2018, it announced integration with Twitch.

Recent Results

Snap reported revenue of $1,067 million in the third quarter of 2021, which shows an increase of 57% from the previous year. The company’s net loss improved 64% to -$72 million, compared to the third quarter of 2020. Adjusted EBITDA was reported as $174 million, indicating an improvement of 209% from the same quarter of the previous year. In addition, the operating cash flow was $72 million compared to -$55 million in the same quarter of the last year.

Snap reported free cash flow of $52 million in the third quarter, compared to -$70 million in the previous year. Cash, cash equivalents, and marketable securities were valued at approximately $3.5 billion.

Snap estimates revenue between $1.165 billion and $1.205 billion and adjusted EBITDA to be between $135 million and $175 million for the fourth quarter.

Valuation Metrics

Snap’s stock is difficult to value due to a high degree of volatility in earnings. That said, the stock’s 114.8x enterprise value-to-forward EBITDA ratio looks very rich, given that the sector median is 9.8x.

Wall Street’s Take

Turning to Wall Street, Snap earns a Strong Buy consensus rating, based on 20 Buys and six Holds assigned in the past three months. Additionally, the average Snap price target of $75.88 implies 42.6% upside potential.

Summary and Conclusions

Snap operates in a high-growth niche and has carved out a solid competitive position. As a result, analysts are overwhelmingly bullish on the stock and give it high upside potential over the next year.

That said, the company’s actual financial results have been uneven thus far, and the current valuation implies significant growth is in store for the future. As a result, while Snap could certainly turn out to be a profitable investment at current prices, investors should keep in mind that it is still a speculative stock at this point. It is uncertain how much the company will be able to grow in the face of stiff competition and rapidly changing consumer tastes.

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

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