Buy Snap Stock When There’s Blood in the Street

Bret Kenwell

Sun, Jun 12, 2022, 5:03 AM 5 min read

While management called it a “challenging” environment, they were optimistic. That optimism faded pretty quickly, as shares plunged 43% in a single day following an earnings and revenue update. Management said those metrics would come in below the low-end of the prior range given about a month ago, as “the macroeconomic environment has deteriorated further and faster than anticipated.”

Clearly, Snap’s management isn’t good for guidance or long-term outlooks! But that doesn’t make its business worthless.

Ticker	Company	Current Price
SNAP	Snap	$13.28

Forget About Guidance For a Minute

Snap lost 2 cents a share last quarter. In the prior six quarters, the company turned in breakeven or better results. In the prior quarter — the one reported in February — Snap reported its first quarter of positive net income. Further, Snap became free cash flow (FCF) positive last year. On a trailing 12-month basis, the company has generated just $203 million in FCF. Last quarter alone, Snap generated more than $100 in FCF.

Further, daily active users (DAUs) increased 18% year-over-year to 332 million last quarter. Name another social media stock with 18% user growth right now.

Twitter (NYSE:TWTR) grew monetizable daily active users (mDAU) 15.9% in the quarter. But mDAU is defined differently than DAU. Not to mention Twitter has the whole Elon Musk hoopla going on and had to restate its user growth after miscounting it for almost three years.

Snap is not perfect — clearly — but it’s still growing its user base.

Leaning on estimates is a dangerous thing to do — especially in this case — so I would take them with a grain of salt. However, analysts still expect Snap to be profitable this year and generate even more earnings in 2023. Expectations call for earnings to be halved this year versus 2021, but almost triple in 2023.

On the revenue front, analysts still expect 23% growth this year and an acceleration up to 36% growth in 2023. Estimates are quite optimistic for 2024 and 2025, too. If they come to fruition — which is a big “if” — we’re talking about a company that did $4.12 billion in sales in 2021 to one that would be approaching $12 billion in 2025.

Is Snap Stock Worth the Risk?

On the one hand, the future looks bright. Because it’s the future though, it’s not guaranteed. On the other hand, we have the present, and in the present, we know there’s some deterioration. The question is, has that been priced into SNAP stock?

At the end of the day, Snap trades at a similar price-to-sales ratio as its peers (although it’s cheaper than Twitter). That said, it’s not as profitable as its peers, hence the price-to-sales ratio rather than price-to-earnings. When it comes to gross margins, it’s down near Twitter’s profile (in the 60% range) rather than up near industry leaders like Meta and Pinterest (NYSE:PINS) (at or above 80%).

Again, we’ve established that Snap is not perfect. In a recessionary environment, that’s not good. Stocks are going to get sold in those environments and those without profits will suffer more than those that do. That’s a general rule of thumb. That said, it’s hard to deny the growth with Snap — both in regards to its users and its revenue. As its revenue continues to climb alongside free cash flow, the door to profitability opens up.

The question becomes this: After an 84% dip in Snap stock, is the risk worth it?

A Look at the Chart

Click to Enlarge

Source: Chart courtesy of TrendSpider

Aggressive bulls can be long on this current dip, but I’d keep a careful eye on the May 24 low at $12.55. A close below that level can start opening up more downside potential, like $10 or lower. Remember, this stock sank to $7.89 in March 2020. That’s not to say it will go there again, but in a bearish environment, who’s to say it won’t?

While that’s 91% below the high — just slightly worse than the 85% peak-to-trough drop Snap sports now — it would mean a 41% decline from current levels.

Outside of that setup, I would be dollar-cost-averaging below $10. That to me represents value in a long-term growth vehicle. On the upside, traders should keep an eye on $20, then on the $24 to $25 area.

On the date of publication, Bret Kenwell held a long position in PINS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.