Camera company Snap Inc. (SNAP), which is based in Venice, Calif., celebrated its 10th anniversary this quarter. The company offers Snapchat, a camera application that helps people to communicate through short videos and images. The company also provides a suite of content tools for partners to build, edit, and publish snaps and attachments based on editorial content; and Spectacles, which are sunglasses that capture video from a human perspective. 

SNAP recently reported its third-quarter earnings results. Its daily active users increased 23% year-over-year to 306 million during the quarter, and its revenue increased 57% year-over-year to $1.07 billion. However, the stock has lost more than 30% in price since reporting earnings on October 22, 2021, to close the last trading session at $52.02, because the company failed to meet its revenue guidance.

Also, the stock has declined 35% over the past month and is currently trading 37.6% below its 52-week high of $83.30, which it hit on September 24, 2021. SNAP has warned that global supply chain interruptions and labor shortages could reduce its short-term appetite to generate additional customer demand through advertising. So, the company’s near-term prospects look uncertain.

Ongoing Investigations

A law firm is investigating potential claims against SNAP on behalf of its stockholders on concerns whether it has violated federal securities laws and/or engaged in other unlawful business practices. It is alleged that the company missed revenue expectations, citing Apple’s iPhone privacy changes as the source of disruptions to the company’s advertising business.

Low Profitability

In terms of its trailing-12-month EBITDA margin, SNAP’s 7.14% is 47.6% lower than the 13.62% industry average Likewise, its 1.78% trailing-12-month net income margin is 66.3% lower than the 5.27% industry average. Furthermore, the stock’s 2.34% trailing-12-month levered FCF margin is 53.2% lower than the 5.01% industry average.

Lofty Valuation

In terms of forward P/B, SNAP’s 4.87x is 52.6% higher than the 3.19x industry average. Likewise, its 23.46x forward non-GAAP P/E is 18.4% higher than the 19.82x industry average. The stock’s forward P/CF and non-GAAP PEG of 16.26x and 2.84x, respectively, are higher than the 14.39x and 2.63x industry averages.

POWR Ratings Reflect Bleak Prospects

SNAP has an overall D rating, which equates 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, which is in sync with its lower-than-industry profitability ratios.

The stock has a D grade for Stability, which is consistent with its 1.26 beta. In addition, SNAP has a D grade for Value, in sync with its higher-than-industry valuation ratios.

SNAP is ranked #71 of 79 stocks in the Internet industry. Click here to access SNAP’s ratings for Growth, Momentum, and Sentiment as well.

Bottom Line

SNAP is currently trading below its 50-day and 200-day moving averages of $72.72 and $67.11, respectively, indicating a downtrend. Moreover, its shares could continue retreating in price in the near term due to global supply chain issues and labor shortages that are impacting its partners. Because the stock looks overvalued at the current price level, we think it is best avoided now.

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

While SNAP has an overall POWR Rating of D, one  might want to consider investing in the following Internet stocks with an A (Strong Buy) and B (Buy) rating: Travelzoo (TZOO), Alphabet Inc. (GOOGL), and Cars.com Inc. (CARS).

SNAP shares were trading at $54.39 per share on Thursday afternoon, up $2.37 (+4.56%). Year-to-date, SNAP has gained 8.63%, versus a 23.78% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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