Competition, Price Multiples Lead to Caution By TipRanks
Snap (NYSE:) is a camera application company in the United States.
Its flagship product allows you to send short video and image messages. The stock has a negative sentiment. (See SNAP stock charts on TipRanks)
Snapchat stock has gained an enormous 204.3% over the past year, and Goldman Sachs (NYSE:) believes the stock could reach the $90 handle.
Goldman attributes the value drivers to user growth, inflation in ad prices, and innovation within core advertising.
The Stock’s Priced In
What needs to be considered is the possibility of the stock already being priced in. Snap’s trailing stock price to sales (32.5) and EV/Sales (24.99) multiples are out of sync.
At 116% year-over-year revenue growth, multiples can be irrelevant, but Snap’s struggling with its profit margins, as it’s yet to turn in an operating profit.
Other factors that could dent the stock’s prospects are the increase in its weighted average cost of capital, and its proposed $1-billion convertible note offering.
Snap must eventually provide shareholder value. Snap is one example of growth stock that was inflated in the panic phase.
Industry Concentration and Competition
Snap being a single-product company means that its industry concentration is high, which causes significant unsystematic risk.
Snap must continue to burn significant amounts of cash in order to maintain its growth, despite stiff competition from Facebook (NASDAQ).
Snap could be concerned by Facebook’s imitation of Snapchat’s core features and its penetration into the AR advertising marketplace.
Wall Street’s Take & Final Word
Wall Street thinks Snap is a Moderate Buy, with the only Sell rating coming from Jason Bazinet of Citigroup (NYSE:). With an average SNAP target price of $87.17, there is 18.2% upside potential.
Snap is an excellent company but its stock price is too high. Snap’s top-line growth is only good for so much time before investors demand profitability.
Snap may not be able to achieve profitability anytime soon, despite having margins that are significantly higher than before. This is because it must keep spending significant amounts of money in order to compete.
It is clear that Snap’s valuation multiples have been overcooked and that the increasing cost of capital doesn’t give reason to be excited.
Disclosure: Steve Gray Booyens didn’t hold any positions in the securities discussed in this article at the time it was published.
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