Internet Content & Information company Snap stunned Wall Street today as it surged to $12.05, marking a 13.19% change compared to the S&P 500 and the Nasdaq indices, which logged 0.61% and 1.03% respectively. SNAP is 5.1% above its average analyst target price of $11.47, which implies future downside for the stock. Indeed, the average analayst rating for the stock is hold, showing a rather gloomy outlook. Over the last year, Snap has underperfomed the S&P 500 by 64.12%, moving -67.82%.
Snap Inc. is a camera company in the United States and internationally. The company is a technology company. Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets.
Snap does not release its trailing 12 month P/E ratio since its earnings per share of $-0.89 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SNAP of -13.54. Based on the company's positive earnings guidance of $0.39, the stock has a forward P/E ratio of . The average trailing Price to Earnings (P/E) ratio of US-based technology companies is 27.16 as of first quarter of 2023. In contrast, the S&P 500 average is 15.97. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
Snap's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 5.64 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.
To better understand the strength of Snap's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Revenue (k) | Operating Expenses (k) | Operating Margin | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $4,627,409 | $4,503,060 | -30.15% | -76.11% |
| 2021-12-31 | $4,101,850 | $3,132,071 | -17.12% | 52.1% |
| 2020-12-31 | $2,412,213 | $2,219,693 | -35.74% | 43.8% |
| 2019-12-31 | $1,735,139 | $1,916,541 | -63.59% | 41.13% |
| 2018-12-31 | $1,174,352 | $1,726,186 | -108.01% | n/a |
- Average operating margins: -50.92 %
- Average operating margins growth rate: 12.18 %
- Coefficient of variability (lower numbers indicate less volatility): 71 %
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Snap's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations (k) | Capital Expenditures (k) | Free Cash Flow (k) | YoY Growth |
|---|---|---|---|---|
| 2022-12-31 | $184,614 | $129,306 | $55,308 | -75.2% |
| 2021-12-31 | $292,880 | $69,875 | $223,005 | 198.9% |
| 2020-12-31 | -$167,644 | $57,832 | -$225,476 | 33.96% |
| 2019-12-31 | -$304,958 | $36,478 | -$341,436 | 57.99% |
| 2018-12-31 | -$689,924 | $122,807 | -$812,731 | n/a |
- Average free cash flow: $-220,266,000.00
- Average free cash flow growth rate: 43.13 %
- Coefficient of variability (the lower the better): 181 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in SNAP have received an annualized dividend yield of 0.0% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). As of the first quarter of 2023, the mean P/B ratio of the technology sector is 6.23, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Snap's P/B ratio is 5.31, indicating that the market value of the company exceeds its book value by a factor of more than5, but is still below the average P/B ratio of the Technology sector.
Since it has a negative P/E ratio, an average P/B ratio, and negative cash flows on an upwards trend, Snap is likely overvalued at today's prices. The company has poor growth indicators because of its consistently negative margins with a positive growth rate. We hope you enjoyed this basic overview of SNAP's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.
