Like many other technology companies, social media company Snap Inc. (SNAP) has struggled this year. The stock has declined 78.1% in price year-to-date and 79.6% over the past year to close the last trading session at $10.32. It is trading 81.2% below its 52-week high of $54.89, which it hit on December 9, 2021.

Although the company beat the consensus EPS estimate in the third quarter, its quarterly revenue came 0.9% below analyst estimates. It was also the first time since its listing in 2017 that the company has reported a single-digit rise in revenues.

Its daily active users rose 19% year-over-year, and its global daily active users (DAUs) came in at 363 million compared to the expected 358.2 million. However, its average revenue per user (ARPU) declined 11% to $3.11.

Although SNAP reported a much better-than-expected adjusted EPS, its net loss rose 400% year-over-year to $360 million, partly due to a $155 million restricting charge, including severance and related costs.

SNAP announced in August that it would lay off 20% of its workforce and scrap several projects, such as its Pixy photo-taking drone, Snap Minis third-party apps, and Snap Games.

SNAP Chief Executive Evan Spiegel said, “We are restructuring our business to increase focus on our three strategic priorities: community growth, revenue growth, and augmented reality.” “Projects that don’t directly contribute to these areas will be discontinued or receive substantially reduced investment,” he added.

The company also said that it was in the “process of winding down” its Zenly map product and mobile music app Voisey. In its letter to investors, SNAP said, “Our revenue growth continued to decelerate in Q3 and continues to be impacted by a number of factors we have noted throughout the past year, including platform policy changes, macroeconomic headwinds, and increased competition.”

“We are finding that our advertisement partners across many industries are decreasing their marketing budgets, especially in the face of operating environment headwinds, inflation-driven cost pressures, and rising costs of capital,” the company added.

For the second consecutive period, SNAP did not provide any specific guidance. The company said, “Forward-looking revenue visibility remains incredibly challenging, and this is compounded by the fact that revenue in Q4 is typically disproportionately generated in the back half of the quarter, which further reduces our visibility.”

It expects its revenue growth to keep decelerating in the fourth quarter as it “has historically been relatively more dependent on brand-oriented advertising revenue.”

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

Weak Financials

SNAP’s non-GAAP net income decreased 50.8% year-over-year to $132.06 million for the third quarter ended September 30, 2022. Its adjusted EBITDA declined 58.3% year-over-year to $72.64 million. In addition, its non-GAAP EPS came in at $0.08, representing a decline of 52.9% year-over-year. Also, its free cash flow declined 65% year-over-year to $18.11 million.

Mixed Analyst Estimates

Analysts expect SNAP’s EPS for fiscal 2022 to decline 72.1% year-over-year to $0.14. On the other hand, its EPS for fiscal 2023 is expected to increase 157.7% year-over-year to $0.36. Its revenue for fiscal 2022 and 2023 is expected to increase 12.1% and 10.2% year-over-year to $4.61 billion and $5.08 billion, respectively.

Stretched Valuation

In terms of forward EV/S, SNAP’s 3.55x is 87.7% higher than the 1.89x industry average. Likewise, its 3.61x forward P/S is 185.7% higher than the 1.26x industry average. Its 47.25x EV/EBITDA is 455.6% higher than the 8.51x industry average.

Weak Profitability

SNAP’s trailing-12-month EBIT margin is negative compared to the 9.23% industry average. Likewise, its trailing-12-month net income margin is negative compared to the 4.46% industry average. Also, its trailing-12-month EBITDA margin is negative compared to the 17.84% industry average.

POWR Ratings Reflect Bleak Prospects

SNAP has an overall D rating, equating to 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 a D grade for Quality, in sync with its weak profitability.

It has a C grade for Sentiment, consistent with its mixed analyst estimates.

SNAP is ranked #52 out of 58 stocks in the F-rated Internet industry. Click here to access SNAP’s ratings for Growth, Value, Momentum, and Stability.

Bottom Line

SNAP is trading below its 50-day and 200-day moving averages of $10.36 and $19.23, respectively, indicating a downtrend. The current uncertain macroeconomic environment has hit the profitability of many consumer-facing businesses, and SNAP is no exception.

The company did not guide for the current quarter as it fears its revenue may take a hit as the economic slowdown and recession have led to many advertisers pausing or reducing spending on ad campaigns. In addition, platform policy changes, macroeconomic pressures, and rising competition are expected to keep the stock under pressure in the upcoming months.

Given its weak financials, stretched valuation, and weak profitability, it could be wise to avoid the stock now.

How Does Snap Inc. (SNAP) Stack up Against Its Peers?

SNAP has an overall POWR Rating of D, equating to a Sell. Therefore, one should consider investing in other Internet stocks with a B (Buy) rating, such as trivago N.V. (TRVG), Yelp Inc. (YELP), and Travelzoo (TZOO).

SNAP shares fell $0.06 (-0.58%) in premarket trading Friday. Year-to-date, SNAP has declined -78.18%, versus a -14.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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