Snap Inc. (SNAP) functions as a camera company in North America, Europe, and internationally. The company offers a camera application, Snapchat, with various functionalities, including Camera, Communication, Snap Map, Stories, and Spotlight, enabling people to communicate visually through short videos and images. In addition, it provides advertising products, such as AR ads and Snap ads.

Investors have been bearish about SNAP due to its deteriorating financials and decelerating growth. Various macroeconomic headwinds, platform policy changes, and increased competition among social media and digital ad companies pose significant threats to the company.

SNAP reported weak top-line growth and a loss for the second quarter of fiscal 2022. The company’s revenue increased 13% from the prior-year period to $1.11 billion, which was short of analysts’ estimates. Its net loss widened 178% year-over-year to $422.07 million.

In addition, the company failed to issue guidance, indicating that it is seriously struggling amid the current uncertain macroeconomic environment.

Furthermore, SNAP’s two key advertising executives, its chief business officer, Jeremi Gorman, and the head of Americas sales, Peter Naylor, would join the video-streaming company Netflix Inc. (NFLX). Citi Research stated that the departure of the two major ad executives is expected to be detrimental to the company’s turnaround.

SNAP has plunged 77.6% in price year-to-date and 87% over the past year to close the last trading session at $10.45. The stock is currently trading 86.8% below its 52-week high of $79.30, which it hit on October 18, 2021.

Here is what I think could influence SNAP’s performance in the upcoming months:

Poor Financials

In the fiscal 2022 second quarter ended June 30, 2022, SNAP’s total costs and expenses increased 28.7% year-over-year to $1.51 billion. The company’s operating loss amounted to $400.94 million, compared to a $192.51 million loss in the prior-year quarter. Its adjusted EBITDA declined 93.9% year-over-year to $7.19 million.

In addition, the company’s net loss came in at $422.07 million, worsening 178.3% year-over-year. Its non-GAAP net loss per share was $0.02, compared to an income of $0.10 per share in the year-ago quarter. Also, its free cash outflow came in at $147.45 million versus the $115.71 million in the previous year’s quarter.

Unfavorable Analyst Estimates

Analysts expect SNAP’s loss per share to widen 111.8% year-over-year to $0.02 in the fiscal 2022 third quarter (ending September 2022). The consensus EPS estimate of $0.05 for the current year (ending December 2022) indicates a decline of 90% from the last year. Also, Street expects the company’s EPS to decline 17.4% per annum over the next five years.

Stretched Valuation

In terms of forward non-GAAP P/E, SNAP’s 180.42x is 1,167.6% higher than the 14.23x industry average. Its forward EV/Sales of 3.46x is 84.8% higher than the 1.87x industry average. In addition, the stock’s 47.73x forward EV/EBITDA is 546.4% higher than the 7.38x industry average.

Furthermore, SNAP’s 3.70x Price/Sales is 246% higher than the industry average of 1.07x. Also, the stock’s 5.54x forward Price/Book is 213.5% higher than the 1.77x industry average.

Low Profitability

SNAP’s trailing-12-month EBIT margin of negative 19.35% compares to the 9.36% industry average. Its trailing-12-month EBITDA margin of negative 15.28% compares to the industry average of 19.31%. And the stock’s trailing-12-month net income margin is also negative compared to the 5.73% industry average.

In addition, the stock’s negative ROCE, ROTC, and ROTA of 26.17%, 8.16%, and 9.45% compare to the industry averages of 6.66%, 3.58%, and 2.48%, respectively.

POWR Ratings Reflect Bleak Prospects

SNAP has an overall rating of F, translating to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SNAP has an F grade for Stability. The stock’s beta of 1.52 justifies the Stability grade. In addition, it has a D grade for Quality, consistent with its lower-than-industry profitability metrics.

SNAP is ranked #59 out of 65 stocks in the F-rated Internet industry. 

Beyond what I have stated above, we have also given SNAP grades for Sentiment, Value, Growth, and Momentum. Get all SNAP ratings here.

Bottom Line

The social media company SNAP’s disappointing second-quarter financial results alarmed investors, and the stock is currently trading more than 85% below its 52-week high.

Given SNAP’s poor financials, bleak growth prospects, higher-than-industry valuation, and low profitability, we think it could be wise to avoid the stock now.

How Does Snap Inc. (SNAP) Stack Up Against its Peers?

While SNAP has an overall POWR Rating of F, one could check out these other stocks within the Internet industry with a B (Buy) rating: Expedia Group Inc. (EXPE), Yelp Inc. (YELP), and trivago N.V. (TRVG).

SNAP shares rose $0.02 (+0.19%) in premarket trading Wednesday. Year-to-date, SNAP has declined -77.67%, versus a -22.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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