The Seville Reporters
Social Media Stock To Watch, If Market Sell Off is Over
SNAP's stock is 80% below its all-time high following an earnings miss and an adjustment to its revenue forecast.
Apple's iPhone update that prevents companies from tracking iPhone users without the user's consent had a negative impact on SNAP, but the company may have found a workaround.
Gen Z's connection to Snapchat as well as Snapchat's work with augmented reality are two of several reasons that SNAP's stock price could bounce back in a big way.
On December 20, 2018 SNAP’s ($SNAP) stock traded below $5.00 a share. SNAP, the parent company of social media app Snapchat, had been a publicly traded company for 21 months up to that point. In those first 21 months, SNAP’s stock spent 17 months trading below its IPO price.
That December, SNAP’s market value was just over $7 billion, and it represented a 70% drop from its IPO value. Between March 2, 2017 - SNAP’s IPO date - and December 20, 2018, the S&P 500 had registered a 3.5% gain, and Twitter’s ($TWTR) stock price had increased by nearly 60%. As a public company, things weren’t going well for SNAP and its leadership.
But December 2018 would mark the low for SNAP. Later on, the company would release its baby face filter, which became extremely popular across social media and television, and the stock price would rebound, trading to $18 a share before selling off again in 2020 when the world went into lockdown due to the coronavirus. From the March 2020 bottom caused by the pandemic, SNAP’s stock would go on a major rally from below $9, and peak at $83.00 per share in September 2021.
Where it Started to Fall Apart
October 21, 2021, SNAP reported $1.07 billion in revenue during the third quarter of 2021, a 57% year-over-year increase in revenue, but $30 million below analyst’s estimates and below the low-end of the company’s own revenue guidance. The reason behind the revenue miss was Apple. Apple's upgraded software to its iPhone line, prevented digital advertisers from tracking users without their consent. SNAP’s stock price would fall 23% after the earnings release.
Where it Continued to Fall Apart
In May of 2022, SNAP warned investors that due to a deteriorating economy, the company’s revenue and adjusted EBITDA (earnings before interest tax depreciation and amortization) would come in below their previously stated guidance. The stock fell 43% on the news.
Where it is Now
SNAP closed this week at $14.96 per share. Once again, the stock is trading below its $17 IPO price, and is 81% off its all-time high.
What Could Spark Its Recovery
Before the announcement in May that alerted investors to the company’s struggles in the current economic environment, SNAP’s stock was trading close to $23.00 per share. Now trading at just under $15 per share, the stock could see an increase if the company is able to meet the low expectations the market has for it. Analysts have revised their full year earnings per share expectations for SNAP down from $0.50 cents a share to $.22 per share. If June 22, 2022 was the market low, and the stock market and global business activity stabilizes over the next five months, Snap could meet and possibly exceed analyst's estimates.
Recessions and economic slow downs force companies to look closer at expenses. Tech companies all over the globe are either cutting staff or putting a pause on hiring due to the slow down in business activity. In 2018, 2019, 2020, and 2021, SNAP grew revenue year-over-year by 43%, 45%, 46% and 64% respectively, yet the company has been unable to show a yearly profit. On an adjusted EBITDA basis, the company does make money, because stock-based compensation - a way of paying employees with equity in the business - isn’t counted against revenue. But for investors who prefer profits based on generally accepted accounting principles, SNAP is heading in the right direction. Since 2017 net losses have been getting smaller. SNAP reported a loss of $3.4 billion in 2017, and in 2021 SNAP’s net loss was $488 million. If the company can continue to grow revenue close to a rate that it has in the past, while lowering expenses, the stock will look more attractive to investors who prioritize company profits in their investment decision making.
Snap also has youth on its side. Over the last year, Meta’s failure to attract younger users to its platform has been well documented, but that’s not a problem for SNAP. According to Sprouts Social, 48% of Snapchat users are between 15 and 25 years old. Snapchat has been the social media platform of choice for Gen Z (people born between 1997 and 2012). A Wunderman Thompson report puts Gen Z spending at almost $100 billion, and that doesn’t include the impact that the younger Gen Z members have on their parent’s spending. In comparison, Millennial spending is only $65 billion. If brands want to get their products and services in front of Gen Z, Snapchat is one of the best places to do it.
There are other catalysts that could spur a rise in SNAP’s stock price. The first is Snapchat Plus, a subscription service recently rolled out by SNAP. The service allows subscribers to categorize other Snapchat users as “BFFs, as well as view who rewatched their stories. The service also allows subscribers to customize the app icon. SNAP could offer more services to subscribers in the future.
A second catalyst is its work in the augmented reality space. SNAP’s augmented reality developer tool, SNAP AR has a community of over 250,000 creators, developers and partners. Over 2.5 million lenses have been created by the community, and they’ve generated over 3.5 trillion lens views.
Currently there is a lot of hype around anything linking itself to the metaverse, but the metaverse, as it was described by Meta ($META) CEO Mark Zuckerberg, still remains a big gamble from an investment standpoint. Snapchat however, has proven that there is value in augmented reality. And this has prompted advertisers to develop advertisements that take advantage of SNAP’s augmented reality tools. SNAP is providing even more assistance to augmented reality creators with the latest SNAP Spectacles, which have been designed to help SNAP AR creators develop and deliver an immersive augmented reality experience for Snapchat users. What the metaverse will be or won't be is still up in the air, but augmented reality is here and in play, and Snapchat’s work with augmented reality could pay off big for the company and its investors.
A third catalyst is that TikTok is back in the news. The U.S. Federal Communications Commission has requested that Apple and Google remove TikTok from their app stores. The FCC believes that TikTok - a Chinese Company - poses a security concern. Brendan Carr, one of the FCC commissioners shared on Twitter his thoughts that TikTok is only posing as a video app in order to harvest sensitive data.
We’ve heard this before under former U.S. President Donald Trump, and it created a lot of spectacle, but nothing materialized from the accusations. Even with the former president pressuring Chinese owner ByteDance into selling the U.S. version of TikTok, no sale ever materialized. There aren’t many reasons to believe that anything will come from this latest accusation of TikTok, but if something does, it could be a big win for SnapChat, which shares similar features to TikTok.
The Not So Good
When compared to the other popular publicly traded social media networks, Meta, Twitter, and Pinterest ($PINS), SNAP doesn’t represent a bargain. The company’s price-to-forward earnings doubles that of the average S&P 500 company within its sector and industry. As stated earlier, the company has yet to report a yearly profit, which leads to a negative return on assets and a negative return on equity.
For investors, SNAP isn’t particularly a bargain play. The hope is that upward market momentum and improving company fundamentals can generate buzz around the stock and push it back towards its old highs.
Undervalued Bargain with Potential or Speculative Tech Stock
If June 22nd is the market low, and business activity picks up in the second half of 2022, SNAP could surpass analysts' expectations in 2022. In addition, SNAP's connection to Gen Z, its work with augmented reality, and SnapChat Plus could be major factors in the stock prices recovery.
An investment in SNAP is a bet. A bet that the company’s fundamentals improve with the economy and that SNAP’s initiatives pay off. There are safer investments out there, but for investors who are looking to take a chance on a tech stock, SNAP is worth the look.