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The rally surrounding tech stocks has driven shares of social media company Snap (SNAP) higher by 15% in the last month and by 35% year-to-date. Valued at a market cap of $19 billion, Snap stock still trades 85% below all-time highs, set in 2021, and is trailing the broader markets by a wide margin since its initial public offering or IPO.
Snap went public at $17 per share in March 2017. It then touched a record high of $83 in September 2021 and currently trades at $12.12. Let’s see if Snap stock should be part of your portfolio right now.
An Overview of Snap
Snap is a technology company that owns and operates Snapchat, its flagship product. Snapchat is a visual messaging application that allows you to connect with users around the globe using augmented reality, video, voice, and other creative tools.
The company generates a majority of its sales from online ads, and Snap aims to connect brands and direct response advertisers with its wide base of users. Enterprises and brands can advertise through Snap’s augmented reality (AR) tools, such as AR Lenses, unlocking the ability to target and reach users in a differentiated way.
AR Lenses allows advertisers to create engaging 3D experiences across categories such as apparel, footwear, and accessories. Alternatively, Snap Ads offers a platform for advertisers to use full-screen videos with sound and integrate additional experiences within these ads.
Snap aims to continually improve the way ad formats are purchased and delivered by investing heavily to build an automated and scalable ad platform. Moreover, its delivery framework optimizes the relevance of ads, offering advertisers to increase their return on investment.
Snap operates in the social media space, which means it competes with giants such as Alphabet’s (GOOGL) YouTube, Meta’s (META) Facebook, Instagram and WhatsApp, Twitter, as well as TikTok and Pinterest (PINS).
The Bull Case for Snap Stock
Snap stock has gained momentum in recent trading sessions as investors believe it is well-positioned to benefit from the artificial intelligence or AI megatrend. In the last few months, generative AI creation has gained popularity, capturing the imagination of millions of users globally.
It's quite easy to generate AI images by using a few text prompts, and last month Snap announced its entry in this highly disruptive segment with SnapFusion. According to the company, users can create images in just a few seconds using SnapFusion, which should allow it to expand its user base in the upcoming quarters.
It has integrated ChatGPT with Snapchat and equipped users with a feature known as My AI. Basically, My AI is a chatbot that provides you with recommendations for places to visit or which AR Lenses you can use.
In June 2022, Snap launched Snapchat+, a subscription-based product that has already onboarded four million customers. In fact, it ended April 2023 with three million subscribers and is gaining traction at a rapid pace, allowing Snap to generate a stable stream of revenue across market cycles.
Due to its ongoing innovation and addition of new features, Snap increased its daily active users to 383 million in Q1, up from 332 million in the year-ago quarter.
The Bear Case for Snap Stock
In the last two years, Snap has been hurt by Apple’s (AAPL) iOS privacy changes which negatively impacts the ability of the company to sell targeted ads to enterprises. Additionally, a challenging macro environment has reduced ad spending significantly in recent quarters. While Snap increased sales by 64% year over year to $4.1 billion in 2021, top-line growth decelerated to just 12% in 2022.
Snap stated its daily active users (DAUs) and engagement increased in Q1, but sales still fell 7% year over year to $988.7 million in the March quarter. It remains unprofitable and reported a net loss of $328.7 million in Q1, an improvement of 9% compared to the year-ago period. Snap attributed the revenue decline to changes in its ad platform. It also expects sales to fall by 6% to $1.04 billion in Q2 of 2023.
Several experts are still forecasting an economic recession in the next 12 months, which is likely to drive consumer spending lower, resulting in lower ad sales for Snap and its social media peers.
Analysts covering Snap stock expect sales in 2023 to fall by 1.6% year over year to $4.53 billion, while adjusted losses are forecast to widen from $0.49 per share to $0.76 per share.
So, SNAP stock is priced at 4.8 times forward sales, which is quite steep for a loss-making company.
The Final Takeaway
Snap remains a high-risk investment for long-term investors. It competes with several tech heavyweights that are armed with deep pockets and resources to reinvest heavily in research and development, which should improve customer engagement rates over time. Snap will have to keep increasing its user base and find ways to monetize these users in the upcoming decade, which is quite difficult.
Analysts remain cautious about Snap's stock. Out of the 32 analysts covering Snap, two recommend a “strong buy”, one recommends a “moderate buy”, 27 recommend a “hold,” and two recommend a “strong sell”. Wall Street has an mean price target of $9.98 for Snap which is 17.5% below its current trading price.
I believe there are several other tech stocks you can buy right now that are equipped with better financials compared to Snap while trading at a lower valuation.
On the date of publication, Aditya Raghunath 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.
