Is Snap Stock Overvalued?

Is Snap Stock Overvalued? Social media has established itself as the preferred method of communication among key demographics – and that isn’t limited to individuals making connections with friends and family members.

Businesses have recognized that social media is critical to building customer relationships, and most have established a robust presence on multiple platforms. 

Snapchat was created in 2011 as an answer to one of the biggest concerns among social media users – the fact that once they create a post, it is around forever, which can mean embarrassing moments years down the road. Snapchat messages, photos, and videos can disappear – theoretically forever – within a few minutes of posting. 

The concept was so popular that Snapchat grew from an idea to a $77 billion dollar business in less than ten years.

It has expanded from its original format to a wide-reaching platform that includes digital payments, avatars, augmented reality (AR) lenses, and gaming. These features have attracted around 250 million daily active users from around the world.

At its low, Snapchat stock dipped to $7.89 per share. Then a furious rally ensued. Some investors are rushing to buy in, hoping that 2021 will bring similar growth. Others are concerned that the dramatic rise won’t hold. So, is Snap stock overvalued?

Why Snap Stock Went Up

Snapchat has been in the center of a perfect storm of positive internal and external revenue drivers since March 2020.

The company saw a dip in share prices during the market crash, but it has been on a steady upward trajectory since. That is due, in part, to the reality of pandemic living.

People are staying home more and seeing friends and family less. That means more time to spend on social media – and a greater need to create and maintain connections through digital tools. 

In addition to increased usage – and the increased ad revenue that followed – Snap announced a promising new partnership with Unity Software.

With the help of Unity, Snap can expand its gaming features – a big hit with its primary demographic. More gaming means more advertising dollars, which is a big win for Snap’s top line revenue.

Some of these new features appear aimed at competing with one of the platform’s biggest rivals – TikTok. If Snap succeeds in pulling users away from TikTok, some analysts say the sky’s the limit when it comes to investor returns. 

Solid growth and the expectation of wider appeal inspired investors to drive share prices up – but are those share prices sustainable or will Snap stock drop? 

Snap Financials Were A Positive Blowout

Snap announced its third-quarter results in late October for the period ending September 30, 2020, and the company exceeded expectations by nearly every measure.

Third quarter revenue was the company’s highest ever at $679 million – a year-over-year increase of 52 percent.

Analysts were only expecting to see about $550 million in sales, so those figures were a welcome surprise.

Earnings totaled one cent per share, which sounds low until you consider the expectation of a four-cent per share loss. 

Is Snap Valuation Too High?

While no investment is without risk, most analysts and industry experts agree that Snap stock’s high price is worth every penny.

This year, the company’s revenue is expected to rise a total of 42 percent, and another 42 percent is projected for 2021.

Snap is likely to turn a solid profit in 2021, which is likely to push share prices even higher.

Given that Snap is trading at a little over 20 times sales projected for next year, Snap’s valuation is not too high. If anything, this stock could be a bargain if compared to other tech companies with similarly rapid rates of growth. 

However, a discounted cash flow analysis would suggest that SNAP share price got ahead of itself when it reached its 52-week high, given that the fair market price per share is in the low $40 per share range.

Will Snap Stock Drop?

The past year has been particularly volatile market-wise, and there are no guarantees that 2021 will bring greater stability.

Until the pandemic comes under control and the global political landscape returns to a steady state, dramatic market swings are an ever-present risk. 

Snap stock could drop if outside influences prove disruptive to the larger economy. It is also possible that Snapchat will experience a competitive challenge or security issue that pushes it to the back of the line among social media platforms.

However, given the information available today, there is every reason to believe that Snap stock will continue increasing in value. 

Is Snap Stock Overvalued? The Bottom Line

The bottom line is that Snap stock’s growth seems a bit too speedy, and that creates doubt in the minds of careful investors. There is always a risk that expanding tech companies are getting ahead of themselves from a valuation perspective.

In this case, though, Snap doesn’t not appear overvalued – and many believe it is practically a bargain. If you are looking to add tech to your portfolio, Snap is a smart buy. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.