1 stock you shouldn’t be buying shares of anytime soon

Snap Inc. (SNAP) has struggled to get started this year as it struggled with declining ad spend, growing competition and several other macro headwinds. Despite its lackluster financials and low profitability, the stock trades at a premium to its peers. Therefore, SNAP might be best avoided now. Read more….

Like many other tech companies, social media company Snap Inc. (INSTANTANEOUS) has struggled this year. The stock is down 78.1% 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 reached on December 9, 2021.

Although the company beat the consensus EPS estimate in the third quarter, its quarterly revenue is 0.9% below analysts’ estimates. It was also the first time since its IPO in 2017 that the company recorded a single-digit increase in revenue.

Its daily active users grew 19% year-over-year, and its global daily active users (DAUs) reached 363 million, versus a forecast of 358.2 million. However, its average revenue per user (ARPU) fell 11% to $3.11.

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

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

SNAP CEO Evan Spiegel said, “We are restructuring our business to focus more on our three strategic priorities: community growth, revenue growth and augmented reality. “Projects that do not directly contribute to these areas will be discontinued or receive significantly reduced investments,” he added.

The company also said it was “terminating” its card product Zenly and its mobile music app Voisey. In its letter to investors, SNAP said, “Our revenue growth continued to slow in the third quarter and continues to be impacted by a number of factors that we have noted throughout the past year, including platform policy shifts, macroeconomic headwinds and increased competition.”

“We are seeing our advertising partners across many industries shrink their marketing budgets, particularly in the face of operating environment headwinds, inflation-induced cost pressures and rising capital costs,” added the society.

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 fourth quarter revenue is typically generated disproportionately in the second half of the quarter, further reducing our visibility.”

It expects revenue growth to continue to slow in the fourth quarter as it “has historically been relatively more reliant on brand-driven ad revenue.”

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

Financial weakness

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 decreased 58.3% year-over-year to reach $72.64 million. Additionally, its non-GAAP EPS was $0.08, down 52.9% year-over-year. Additionally, its free cash flow was down 65% year over year to $18.11 million.

Mixed analyst estimates

Analysts expect SNAP’s FY2022 EPS to decline 72.1% year-over-year to $0.14. On the other hand, its EPS for fiscal 2023 is expected to rise 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.

Extended valuation

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

Low profitability

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

POWR ratings reflect bleak outlook

SNAP has an overall D rating, which equates to Selling in our POWR Rankings system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.

Our proprietary scoring system also rates each stock against eight distinct categories. SNAP has a D rating for quality, in line with its low profitability.

It has a C rating for Sentiment, in line with its mixed analyst ratings.

SNAP is ranked #52 out of 58 stocks in the F-rated the Internet industry. Click here to access SNAP’s ratings for growth, value, momentum and stability.

Conclusion

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 hurt the profitability of many consumer-facing businesses, and SNAP is no exception.

The company has not established a guide for the current quarter as it fears its revenue will be hit as the economic downturn and recession have led many advertisers to suspend or cut spending on ad campaigns. Additionally, platform policy shifts, macro pressures, and growing competition are expected to keep the stock under pressure in the coming months.

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

How does Snap Inc. (SNAP) compare to its peers?

SNAP has an overall POWR rating of D, which equates to a sell. Therefore, consideration should be given to investing in other internet stocks with a B (buy) rating, such as trivago NV (TRVG), Yelp Inc. (YAP) and Travelzoo (TZOO).

SNAP shares fell $0.06 (-0.58%) in premarket trading on Friday. Year-to-date, SNAP is down -78.18%, compared to a -14.40% rise in the benchmark S&P 500 over the same period.

About the Author: Dipanjan Banchur

Ever since he was in elementary school, Dipanjan had been interested in the stock market. This enabled him to obtain a master’s degree in finance and accounting. Currently, as an investment analyst and financial journalist, Dipanjan is particularly interested in reading and analyzing emerging trends in financial markets.

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