Is This Underperforming Growth Stock a Buy Ahead of…

Is This Underperforming Growth Stock a Buy Ahead of Earnings?

Valued at $16.8 billion by market cap, Snap Inc. (SNAP) is best known for its social media platform, Snapchat. Snapchat is a media messaging application with various features such as messaging, Stories, Snapstreaks, Snap Map, and more that enable its users to engage with each other through pictures and videos, leading to major popularity among young users. They also offer Spectacles, a product that connects with their platform Snapchat and captures photos and videos from the user’s point of view.

Incorporated in 2010, SNAP is headquartered in Santa Monica, with international operations. Ahead of the company's upcoming earnings report, expected after the market closes next Tuesday, Oct. 29, here's a closer look at what Wall Street is expecting.

SNAP Stock is Underperforming

SNAP stock has endured a tough year so far, sliding 38% on a YTD basis to lag the broader market by a wide margin. Longer term, SNAP has plummeted 87% from its late 2021 highs.

However, the stock still carries a premium valuation. SNAP is not yet profitable on a GAAP basis, but has reported adjusted EBITA profitability for the past four years. The stock trades at nearly 47 times forward adjusted earnings, compared to mega-cap Meta Platforms (META), at 26.53x forward adjusted earnings.

Snap Misses on Revenue, Slows Cash Burn

Snap reported Q2 results on Aug. 1, where it posted a second-quarter loss of $248.6 million, or $0.15 per share. On an adjusted basis, SNAP's profit of $0.02 per share arrived in line with analysts' estimates. Revenue totaled $1.24 billion, slightly behind the forecast of $1.25 billion, but up 16% from the same quarter last year.

The social media company reported a 9% surge in daily active users (DAUs) during the quarter to 432 million, and 850 million monthly active users. However, North American DAUs were down slightly year over year. Adjusted EBITDA for the quarter was $55 million, with negative free cash flow of $73 million showing some improvement from last year's $119 million.

Snap management issued Q3 guidance that disappointed Wall Street, with revenue expected between $1.335 to $1.375 billion and adjusted EBITDA in the range of $70 million to $100 million. Both figures fell short of consensus estimates, at the midpoint.

On average, Wall Street is now looking for a Q3 loss of $0.13 per share from SNAP, or a profit of $0.05, on an adjusted basis. Revenue is expected at $1.36 billion.

Snap Receives an Upgrade

Analysts lean slightly bullish on SNAP stock, which has a consensus “Moderate Buy” rating. Currently, 16 analysts are tracking the stock. with 9 giving it a “Strong Buy” rating, 1 backing a “Moderate Buy” rating, 25 maintaining a “Hold,” and 1 analyst with a “Strong Sell” rating.

With the third-quarter results just days away, JMP upgraded their rating on SNAP stock from “Market Perform” to “Market Outperform,” citing expectations for ad impression tailwinds into 2025.

"We expect ad impression growth to inflect driven by the launch of Sponsored Snaps as U.S. users opened Snapchat ~40x per day with the majority of usage taking place in messaging, in our view," wrote the firm in a note to clients, while setting a $17 price target.

The mean price target for SNAP is $12.81, about 22.5% higher than today's close.

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On the date of publication, Ruchi Gupta did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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