Snap Inc. (SNAP) functions as a camera and social media company in North America, Europe, and internationally. The company offers Snapchat a camera application with various functionalities, such as Camera, Communication, Snap Map, Stories, and Spotlight, that enable people to communicate visually through short videos and images.

Shares of tech stocks, especially the ones issued by social media companies, have been under pressure this year due to the Fed’s interest rate hikes to combat the multi-decade high inflation. Mounting worries about a potential recession have also put pressure on tech stocks, particularly with advertising-based revenue models.

SNAP has lost all of its last year’s gains and fallen back to price levels last witnessed in Spring 2020. One of the major reasons behind the drop in the stock is the company’s disappointing operating performance in recent quarters. The stock has declined 73.3% year-to-date and 82.6% over the past year to close its last trading session at $12.56.

Here is what could shape SNAP’s performance in the near term.

Weak Financials

For the second quarter ending June 30, 2022, SNAP’s operating loss increased 108% year-over-year to $400.94 million. Its net loss increased 178% year-over-year to $422.07 million, while its non-GAAP loss per share came in at $0.02 compared to an EPS of $0.10 in the year-ago quarter. The company’s net cash used in operating activities increased 22.7% from its year-ago value to $124.08 million.

Premium Valuation

The company’s 4.39x forward EV/Sales is 110.1% higher than the 2.09x industry average. In addition, its 4.54x forward Price/Sales is 234.1% higher than the 1.36x industry average. In terms of forward Price/Book, the stock is currently trading at 5.52x, 154% higher than the 2.17x industry average.

Lower-than-industry Profitability

SNAP’s trailing-12-month EBITDA margin of negative 15.28% compares to the 18.63% industry average. In addition, its trailing-12-month negative net income margin of 18.31% compares to the 5.34% industry average. Also, its trailing-12-month ROE, ROC, and ROA are negative 26.17%, 8.16%, and 9.45%, compared to the positive industry averages.

POWR Ratings Reflect Bleak Prospects

SNAP has an overall F grade, equating to Strong Sell in our proprietary 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 and a D for Quality and Momentum. Its Stability grade is in sync with 1.01 beta. In addition, its Quality grade is consistent with its lower-than-industry profitability.

The company’s Momentum grade is justified given that the stock is trading below its 100-day and 200-day moving averages of $19.75 and $30.84.

Among the 65 stocks in the F-rated Internet industry, SNAP is ranked #57.

Beyond what I stated above, we have graded SNAP for Sentiment, Growth, and Value. Get all SNAP ratings here.

Bottom Line

The stock is currently trading below its 100-day and 200-day moving averages, indicating a downtrend. Also, slower advertising revenue due to high competition, increasing recession fears, and higher-than-industry valuation could keep SNAP under pressure. Therefore, the stock is best avoided now.

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

SNAP has an overall POWR Rating of F, equating to Strong Sell. Check out these other stocks within the Consumer Goods industry with B (Buy) ratings: trivago N.V. (TRVG), Expedia Group Inc. (EXPE), and Yelp Inc. (YELP).

SNAP shares fell $0.36 (-2.87%) in premarket trading Friday. Year-to-date, SNAP has declined -74.10%, versus a -10.06% rise in the benchmark S&P 500 index during the same period.

About the Author: Spandan Khandelwal

Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing. More...

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