Snap (NYSE 🙂 is an American camera company. Snap was established on the conviction that reinventing the camera offers the greatest opportunity for humans to live better and communicate more effectively.

This statement is quite bold. It encourages people learn more about the world around them, have fun, and live in the present.

Snap’s top product is Snapchat. It’s a popular smartphone application that millions use every day. In the past few years, Snapchat has witnessed a significant increase in its users. The financials of Snap have grown higher as well.

Snap, though, is probably overvalued. I remain therefore neutral.

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Steep Valuation, Positive Expansion

Snap had begun to slow down in growth several years ago.

Revenue growth was as low at 17% in Q2 2020. The company used the crisis to increase its reach and focus on Snapchat’s abilities as a digital advertising market and content platform.

Simultaneously user growth was also accelerated by the pandemic due to increased communication via the internet.

Snap reported that revenues rose 116% in Q2 2021 over the previous year, bringing them to $982million.

Due to the increased interest from advertisers in Snapchat’s efforts and its user base, the average revenue by user (ARPU), rose 76% year over year to $3.35 per quarter. As Snapchat shifts to younger demographics, this metric will likely continue to grow higher.

The company’s scale is impressive, but gross margins are only around 55%. This leaves little room for growth. Facebook (NASDAQ) has gross margins in excess of 80%. Snap has not posted one profitable quarter since inception.

Snap’s current valuation is not safe for investors. Snap stock trades currently at 22.4x the next 12-month (NTM) revenue, which is not justified.

This multiple is still unlikely to make sense, even if the company has doubled its revenues and achieved a 10-15% margin in net income.

Snap would have to continue its stellar performance for at least the next few years in order to warrant its current valuation. Snap is able to take on any major risk, such as a new competitor capturing market share or user base growth maturing. A competitor entering the market, maturing user base, or capturing market share.Investors could trade stock at a lower valuation and suffer significant losses from current stock price levels.

Wall Street’s Take

Snap’s consensus rating is Moderate Buy. It was based on 27 Buys, 7 Holds and 1 Sell over the past 3 months. At $87.47, the average Snap price target implies 19.2% upside potential.

Disclosure: Nikolaos Sismanis was not in SNAP shares when this article was published, but he had a positive long position in FB shares through stock ownership.

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