Time To Snap Up SNAP Stock?

Snap’s stock (NYSE: SNAP) surged over 10% in after market hours on Tuesday, October 29, after the company posted upbeat Q3 results. Snap reported revenue of $1.37 billion and adjusted earnings of eight cents per share – faring better than the consensus estimates of $1.36 billion and six cents, respectively. In this note, we discuss key takeaways from Snap’s recent results, valuation, and its stock performance.

How Did Snap Fare In Q3?

Snap’s revenue of $1.37 billion in Q3 reflected a 15% y-o-y increase, led by strong paid subscriber growth. Snapchat+ member base reached 12 million subscribers, up over 2x, y-o-y. Daily active users (DAU) climbed 9% to 443 million, and average revenue per user (ARPU) of $3.10 was up 6% y-o-y. Both DAU and ARPU were also better than street estimates. Snap’s adjusted EBITDA margin surged 700 bps y-o-y to 10% in Q3’24. Higher revenues and margin expansion resulted in adjusted earnings surging to $0.08 per share, versus $0.02 in the prior-year quarter.

Looking forward, Snap expects its Q4 sales to be in the range of $1.51 billion and $1.56 billion, and adjusted profits to be in the range of $210 and $260 million. The mid-point of the profit range is better than the consensus estimate for Q4. Furthermore, the company also announced a $500 million share buyback program.

What Does This Mean For SNAP Stock?

With an upbeat quarter, better-than-anticipated profit outlook, and a share buyback plan, the company ticked nearly all the boxes to make investors happy. Unsurprisingly, the stock price surged in aftermarket hours trading.

We estimate Snap’s valuation to be $13, close to the current levels of $12. Our forecast is based on 4x trailing revenues, aligning with the stock’s average P/S ratio over the last four quarters.

SNAP stock has underperformed the broader markets, with a 29% decline this year, vis-à-vis a 22% rise in the S&P500 index. Even if we look over a slightly longer period, the changes in SNAP stock over the last three-year period have been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for SNAP stock were -6% in 2021, -81% in 2022, and 89% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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.

While SNAP stock now looks appropriately priced, it is helpful to see how Snapchat’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 10/30/2024
[2] Cumulative total returns since the end of 2016

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