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After Beating Q2 Earnings is Snap a Buy?

The price of shares of popular camera company Snap (SNAP) shot up significantly over the past month thanks to the company's stunning second-quarter ea...

This story originally appeared on StockNews

The price of shares of popular camera company Snap (SNAP) shot up significantly over the past month thanks to the company's stunning second-quarter earnings and solid user-growth rate. Although the company's substantial progress in developing its augmented reality platform should bode well for the stock, its high valuation in a competitive environment could drive profit-taking. So, let's evaluate if the stock can maintain its momentum. Read on. - StockNews

Camera and social media company Snap Inc. (SNAP), in Venice, Calif., is widely known for its Snapchat camera application that offers users a fast and fun way to share moments with friends and family. SNAP's shares have climbed 55.7% so far this year and 17.5% over the past month, thanks to the company's blockbuster second-quarter earnings report. SNAP has blown past estimates with solid growth in daily active users (DAUs) and revenue. And the company's continuing investment in augmented reality platforms and expanded partnerships to strengthen its content offerings have helped it witness 23% year-over-year growth in DAUs during the quarter.

However, in a highly competitive environment, the stock's lofty valuation remains a concern. In addition, the company has been burning cash at a time when its losses and expenses are already high. Also, since SNAP's business is heavily dependent on DAUs, a decline in the growth rate of its user base or failure to retain existing users could negatively impact the company's revenue-generating prospects.

Here is what we think could influence SNAP's performance in the upcoming months:

Competitive Social Media Landscape

Competition is heating up in the social media space, with several niche platforms rising to capitalize on the growing importance of social media platforms in users' lives. However, popular platforms like Facebook, Inc. (FB) and Twitter, Inc. (TWTR) continue to dominate the industry and grow their market share significantly. SNAP's biggest competitor FB, with its size and influence worldwide, remains a significant threat to the company's growth potential. While SNAP's expanded offerings and innovative camera features have allowed it to grow its young user base, the company has struggled to win over older users, who are clinging to FB.

Mixed Financials

SNAP's revenue rose 116% year-over-year to $982 million in the second quarter ended June 30, 2021. Its non-GAAP EPS came in at $0.10, compared to a $0.09 loss per share in the second quarter of 2020. But the company's net loss came in at $151.66 million for this quarter, while its operating loss amounted to $192.51 million. Also, it reported $1.17 billion total costs and expenses, compared to $764.77 in the prior-year period. SNAP's free cash flow came in at a negative $115.71 million over this period, compared to negative $82.32 million in the prior year quarter.

Selling Shares to Fund Growth

In April, SNAP priced $1.0 billion in convertible senior notes in a private placement with institutional investors. The company plans to redeem all or any portion of the notes for cash on or after May 5, 2024. SNAP expects to use the offering's net proceeds to acquire complementary businesses and for general corporate purposes, including working capital, operating expenses, and capital expenditures.

However, given the company's large losses and weak cash balance, its business could be negatively impacted if it fails to raise subsequent financing.

Stretched Valuation

In terms of non-GAAP forward P/E, SNAP is currently trading at 232.61x, which is 1,080.9% higher than the 19.70x industry average. Its 36.62x trailing-12-month EV/Sales ratio is 1,105.9% higher than the 3.04 industry average. Also, SNAP's 230.86x forward EV/EBITDA ratio is significantly higher than the 10.57x industry average. Furthermore, the stock's respective 35 and 42.28 trailing-12-month Price/Sales and Price/Book multiples compared with 2.10 and 2.65 industry averages.

Consensus Price Target Indicates Potential Downside

Currently trading at $77.97, the $40.12 consensus price target represents a 48.5% potential decline.

POWR Ratings Reflect Bleak Prospects

SNAP has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. SNAP has a D grade for Quality. The stock's 7.1% trailing-12-month levered free cash flow margin, which is 39.9% lower than the 11.8% industry average, is in sync with this grade.

The company has a D Stability grade, which is consistent with its relatively high 1.27 beta. In terms of Value Grade, SNAP has a D. The stock's higher-than-industry P/E ratio is consistent with the grade.

In addition to the grades we've highlighted, one can check out additional SNAP ratings for Growth, Momentum, and Sentiment here. SNAP is ranked #67 of 75 stocks in the F-rated Internet industry.

Click here to view the top-rated stocks in the Internet industry.

Bottom Line

Robust growth in revenue and daily active user base in the last reported quarter and improved content offering have led to SNAP's shares skyrocket year-to-date. However, its premium valuation and ongoing rivalry with FB could make investors nervous about the stock's prospects. Thus, we think SNAP is best avoided now.

SNAP shares were trading at $74.49 per share on Monday morning, down $3.48 (-4.46%). Year-to-date, SNAP has gained 48.77%, versus a 18.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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