One of today's standouts was Snap, a software company whose shares are up 4.2%, outperforming the Nasdaq by 5.0%. At $11.28, the stock is 22.82% above its average analyst target price of $9.18.
The average analyst rating for the stock is hold. SNAP may have outstripped the S&P 500 index by 4.0% today, but it has lagged behind the index by -37.0% over the last year, returning -25.7%.
Snap Inc. operates as a technology company in North America, Europe, 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 $-0.93 were negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for SNAP of -12.1. Based on the company's positive earnings guidance of $0.18, the stock has a forward P/E ratio of 62.6. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 27.16, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Snap's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.
We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 3.25 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not completely justified by its growth levels.
To better understand the strength of Snap's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 4,601,847 | 4,181,811 | -30.32 | -77.83 |
| 2021-12-31 | 4,117,048 | 3,068,871 | -17.05 | 50.42 |
| 2020-12-31 | 2,506,626 | 2,186,193 | -34.39 | 46.52 |
| 2019-12-31 | 1,715,534 | 1,923,024 | -64.31 | n/a |
- Average operating margins: -36.5 %
- Average operating margins growth rate: 17.1 %
- Coefficient of variability (lower numbers indicate less volatility): 54.6 %
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 Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 184,614 | -129,306 | 55,308 | -69.59 |
| 2021-12-31 | 292,880 | -111,035 | 181,845 | 180.65 |
| 2020-12-31 | -167,644 | -57,832 | -225,476 | 33.96 |
| 2019-12-31 | -304,958 | -36,478 | -341,436 | n/a |
- Average free cash flow: $-82439750.0
- Average free cash flow growth rate: 3.8 %
- Coefficient of variability (the lower the better): 294.1 %
Free cash flows represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, SNAP is in a position to do either -- which can encourage more investors to place their capital in the company.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Snap's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 6.98, so it's likely that equity investors are over-valuing the company's assets.
As of first quarter of 2023, Snap is likely overvalued because it has a negative P/E ratio, an average P/B ratio, and an unconvincing cash flow history that are on a flat course. The stock has poor growth indicators because of its consistently negative margins with a positive growth rate, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into SNAP's fundamental values -- especially their trends over time.
