Up 91% YTD, What’s Next For Snap Stock?

Snap’s stock (NYSE: SNAP) has gained approximately 91% YTD as compared to the 25% rise in the S&P500 index over the same period. That said, at its current price of just below $17, it is trading 53% above its fair value of slightly above $11 – Trefis’ estimate for Snap’s valuation.

Amid the current financial backdrop, SNAP stock has suffered a sharp decline of 70% from levels of $50 in early January 2021 to around $15 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the decrease in SNAP stock has been far from consistent. Returns for the stock were -6% in 2021, -81% in 2022, and 91% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 25% in 2023 (YTD) – indicating that SNAP underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could SNAP face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

The company surpassed the street estimates in the third quarter of 2023. It reported total revenues of $1.19 billion – up 5% y-o-y, primarily because of a 12% y-o-y increase in the average daily active users (DAU) to 406 million. However, the positive impact was somewhat offset by a drop in ARPU (average revenue per user) from $3.11 to $2.93. On the cost front, operating expenses increased in the quarter, mainly due to higher costs of revenues. Further, other income was reduced from $71.9 million to -$20.7 million. Overall, the firm posted a net loss of $368.3 million, as compared to the net loss of $359.5 million in the year-ago period.

The top line decreased 2% y-o-y to $3.24 billion in the first nine months of FY 2023. It was primarily because of lower income from the North America region, while the Europe and rest of the world posted growth. Further, the operating expenses as a % of revenues increased over the same period. However, the negative impact was more than offset by higher interest income and other income. It led to a net income of -$1.07 billion, improving the figure from -$1.14 billion in the previous year period.

Moving forward, we expect the same trend to continue in Q4. Overall, we estimate Snap’s revenues to remain around $4.59 billion in FY2023. Additionally, SNAP’s revenue per share (RPS) is likely to decline to $2.84, which coupled with a P/S multiple of 3.9x will lead to a valuation of just above $11.

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