Snap Inc.

Weekly Valuation – Valutico | 30 June 2022

Shares in Snap (WKN: A2DLMS) plunged after the company warned that the current quarter would be worse than expected. The stock is now 83% below its peak of $83.1 reached in September 2021.

It is no surprise that many investors see this as a buying opportunity. It is common for a sharp drop in valuation to attract value-conscious investors. Our valuation team took a closer look at the company’s prospects and considered whether long-term investors should buy Snap stock.

Demand for advertising decreases

Snap is a social media company where participation and use is free. It has 332 million daily active users worldwide, up from 319 million in the previous quarter. Because it is free to join and use, Snap makes money by showing ads to users who visit the app and website. In this regard, the company has done an excellent job.

The company’s revenue has increased from $404 million to $4.1 billion from 2016 to 2021. The tenfold increase is evidence of the value advertisers see in Snap’s hundreds of millions of daily users. The digital nature of Snap’s advertising presents another benefit over traditional non-digital avenues.

Users are only a few clicks away from buying a product on Snap when they see an engaging ad. Compared to radio, newspapers, billboards or even cable TV, this is a huge leap. Of course, there are also advertisements that only serve to increase brand awareness and do not encourage people to buy. In most cases, however, companies advertise by offering a direct opportunity to buy.

In 2021, consumer spending reached $763 billion globally, 22.5% more than the year before. Interestingly, the share of spending on digital channels increased from 52.1% in 2019 to 64.4% in 2021. Headwinds affecting the global economy could slow or reduce ad spending in 2022.

The coronavirus pandemic is causing shortages in the supply chain, from baby food to cars to game consoles. For new and used cars, dealers are charging consumers thousands above manufacturers’ recommended retail prices. With this kind of imbalance between supply and demand, there is less need to advertise.

Russia’s invasion of Ukraine is exacerbating supply chain bottlenecks and uncertainty and fear of escalation have fuelled recession concerns in Europe. Advertisers have undoubtedly noticed the deteriorating conditions which has resulted in lower ad spend in the region.

Snap alluded to these very headwinds when it warned investors on 23 May that it would not meet second-quarter guidance it had given on 21 April. That news sent the stock plunging more than 40% the day after the announcement.

 

Is Snap Inc. undervalued?

The short answer is not particularly. Even after the crash, Snap’s stock is not cheap. With a one-year forward P/E ratio of 19.2x , Snap is just about in line with the median of its peers and still slightly more expensive than the likes of Alphabet and Meta Platforms.

Having said that, if one assumes that Snap can achieve anything resembling its peers’ profit margins in the long run (which analysts seem to think will be the case), there could be a substantial upside. Our DCF valuation delivers a result of USD51bn, roughly double the current market cap. Given Snap’s current losses, it is no surprise that the Trading Comparables approach delivers a valuation that is roughly in line with the current market cap of USD24bn. Accordingly, we have set a value range of USD 20 billion to USD 29 billion and, after the drastic price movement, we consider the company to be fairly valued.

 

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