Snap (SNAP): Insider Insights Suggest a Lucrative Long-Term Internet Buy

Shares of Snap Inc. (SNAP), the parent company of leading social media platform Snapchat, with a market cap of over $15 billion, witnessed a 12% uptick after an internal memo from CEO Evan Spiegel revealed ambitious forecasts to have over 475 million daily active users (DAUs) in 2024, above the 447 million Wall Street projection. According to the memo, the company foresees more than 20% growth in its advertising revenue for the year 2024. The firm's 2023 objectives also include achieving an adjusted EBITDA of $500 million.

The positive response from investors comes on the heels of an "incredibly low" sentiment period surrounding SNAP's financial future, as SNAP was the first ad-reliant social media company to signal dwindling ad demand amid macroeconomic challenges such as burgeoning inflation rates and intense competition among social media platforms.

SNAP has endured several financial setbacks in recent years, shedding nearly 80% of its valuation last year while confronting negative top-line growth in the first quarter of 2023. Such figures have prompted genuine concern over the company's long-term viability. With lousy revenue performance and persistent quarterly net losses, it was unclear whether the company could live up to its premium valuation.

Of the nine targets set by SNAP, significant user engagement – manifested through a 10% increase in the time spent by users consuming content has been its sole accomplishment. However, the encouraging growth forecast has sat well with investors grappling with the company's overall underperformance, straddled by a weak advertising market and stiff competition from AI-based solutions.

Though the company confirms SNAP’s revised 20% revenue growth rate and prospective DAU figures as “stretch, internal goals only,” they still offer a promising outlook. Investors would do well not to hinge entirely on these projections, even as they bolster SNAP's growth narrative.

Investors might want to consider the following additional factors:

Developments and Mixed Financials

SNAP recently posted its third-quarter earnings report. The social media firm's revenue rose 5.3% year-over-year to $1.19 billion, surpassing analysts' expectations. The surge was the first after two consecutive quarters of decline. Although the firm's adjusted income dropped by 75% year-over-year to $0.02 per share, it still marginally surpassed the consensus forecast. As of September 30, 2023, its accumulated deficit stood at $11.29 billion.

Moreover, the company witnessed an 11.8% year-over-year rise in DAUs, reaching 406 million. Since introducing its AI chatbot "My AI," the company reports a substantial engagement of over 200 million people who have exchanged over 20 billion messages.

Snap believes these metrics catapult 'My AI' to join the ranks of some of the most widely utilized AI chatbots today. The company has also launched a new innovative feature powered by Generative AI, 'Dreams.' This addition offers Snapchatters the innovative capability of creating generative AI selfies.

Institutional Ownership

Several institutions have recently modified their SNAP stock holdings. Institutions hold roughly 51.5% of SNAP shares. Of the 628 institutional holders, 215 have increased their positions in the stock. Moreover, 69 institutions have taken new positions (62,532,200 shares).

Price Performance

SNAP cleared Wall Street's low bar, but its stock slumped after the report and remains nearly 46% below its IPO price. SNAP’s stock is trading below its 100- and 200-day moving averages, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $10.08 in the next 12 months, indicating a potential upside of 8.4%. The price target ranges from a low of $7 to a high of $14.

Bottom Line

SNAP's bold aspirations for 2024 imply that the company’s visibility may be on the upswing, likely attributable to advancements in its advertising products. These improvements could signal a pivotal moment for SNAP, potentially heralding the return of solid growth.

SNAP’s inflated valuation is evident from its forward non-GAAP P/E and EV/Sales of 135.63x and 3.44x, 910.3% and 101.4% higher than the industry averages of 13.42x and 1.71x, respectively.

However, it is noteworthy that if SNAP’s revenue growth rates exceed 20% and adjusted EBITDA increases to $500 million by year-end 2023, the stock could be highly undervalued.

Looking forward to the remainder of the year, SNAP’s management has recognized halts in spending from many brand-focused ad campaigns following the ongoing Middle East conflict. Because of this, the company refrains from issuing formal guidance for the fourth quarter of 2023.

Despite this, internal forecasts predict fourth-quarter revenue between $1.32 billion and $1.375 billion, or a growth of 2% to 6%, implying a continued surge in DAUs to between 410 and 412 million.

Analysts expect its revenue for the fiscal fourth quarter ending December 2023 to increase 4.6% year-over-year to $1.36 billion, while its EPS is expected to decline 63% year-over-year to $0.05.

Due to SNAP’s stretched valuations, mixed financials, and varying analyst estimates, investors should proceed with caution. A more lucid understanding of SNAP’s potential for sustainable growth might be necessary before confident investment decisions can be made. Hence, it could be wise to wait for a better entry point in the stock.

2 Overly Traded Stocks to Avoid This Fall

Stubborn inflation, rising interest rates, and consequent market volatility have kept many investors on edge. Inflation shows no signs of slowing, despite the Fed’s aggressive monetary policy tightening.

The consumer price index increased 0.4% sequentially in September, beating the Dow Jones estimate. The headline inflation was up 8.2% on a 12-month basis, hovering near the highest levels in decades.

The surging inflation and hot employment data for September strengthen the case for the Fed announcing a fourth 75-basis-point interest rate hike in next month’s meeting. Given these circumstances, the Conference Board sees a 96% chance of a recession in the United States over the coming 12 months, which might begin before the end of 2022. Moreover, the board projects 2022 real GDP to grow 1.5% year-over-year and 2023 growth to zero percent.

Since the economic headwinds are expected to keep the stock market under pressure, overly traded stock Pfizer Inc. (PFE) and Snap Inc. (SNAP) could be best avoided now, with their intermediate and long-term trends being down.

Pfizer Inc. (PFE)

Popular drugmaker PFE discovers, develops, manufactures, and distributes biopharmaceutical products worldwide. The pandemic made PFE one of the world’s most watched stocks, thanks to its COVID-19 drugs and vaccines. The stock has a market capitalization of $240.55 billion.

Although the company has recently announced some promising deals, acquisitions, and FDA approvals, the stock has declined 27.4% year-to-date, underperforming the S&P 500’s 23% decline. The stock has been underperforming the broader market, with investors pricing in the expected sales decline that the company might experience due to an anticipated slowdown in Covid vaccinations in the near term.

For the fiscal second quarter that ended June 30, 2022, PFE’s revenues increased 46.8% year-over-year to $27.74 billion. However, the company’s revenues largely leaned on sales of its Covid-19 vaccine Comirnaty and its antiviral treatment Paxlovid. The Covid-19 vaccine brought in $8.80 billion in revenue in the second quarter, while sales of Paxlovid totaled $8.10 billion.

Adjusted net income attributable to PFE common shareholders rose 93.5% from the year-ago value to $11.66 billion, while adjusted EPS grew 92.5% year-over-year to $2.04.

Wall Street analysts expect PFE’s revenues to decline in the about-to-be-reported quarter, which ended September 2022. The consensus revenue estimate of $21.33 billion for the fiscal third quarter indicates an 11.5% year-over-year decline. Continue reading "2 Overly Traded Stocks to Avoid This Fall"