Snap Stock Price Dropped 7% In A Day, What To Expect?

Snap’s stock (NYSE: SNAP) dropped 6.9% on 5th August as compared to the 3% decrease in the S&P500 index. In sharp contrast, Snap’s peer Meta Platforms (NASDAQ: META) was down 3% on the 5th. The decline in SNAP stock price was partly due to weak second-quarter results and Q3 guidance (released last week) and partly because of an increase in the unemployment rate – dampening investor sentiment. Notably, the markets in general, have witnessed selling pressure after the July Non-Farm Payrolls data was released on 2nd August, as fear of a potential slowdown spooked investors. Overall, at its current price of just below $9, Snap is trading 34% below its fair value of slightly above $13 – Trefis’ estimate for Snap’s valuation.

Amid the current financial backdrop, SNAP stock has suffered a sharp decline of 80% from levels of $50 in early January 2021 to around $9 now, vs. an increase of about 40% 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 89% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 missed the consensus estimates of revenues and global average revenue-per-user in the second quarter. It posted total revenues of $1.24 billion – up 16% y-o-y, mainly driven by a 9% y-o-y rise in the average daily active users (DAU) to 432 million and an increase in average revenue-per-user (ARPU) from $2.69 to $2.86. On the cost front, operating loss was reduced by 37% y-o-y to $254 million in the quarter. Overall, the firm posted a net loss of $248.6 million, as compared to the net loss of $377.3 million in the year-ago period.

The revenues grew 18% y-o-y to $2.43 billion in the first half of FY2024, driven by growth in both the DAU and ARPU. Further, the operating expenses as a % of revenues reduced over the same period. Altogether, the net loss decreased from $706 million to $553.7 million.

Moving forward, the company expects revenues to remain between $1,335 – $1,375 million in Q3 – lower than the consensus estimates. Overall, we forecast Snap’s revenues to remain around $5.35 billion in FY20234. Additionally, SNAP’s revenue per share (RPS) is likely to improve to $3.31, which coupled with a P/S multiple of 4x will lead to a valuation of just above $13.

[1] Returns as of 8/6/2024
[2] Cumulative total returns since the end of 2016

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