Is Snap Stock Undervalued?

Social media can be fickle with users flocking to new apps as trends change and more engaging platforms emerge. As TikTok, Instagram, and YouTube have grown, they have drawn many users away from once-popular platforms.

Snap, Inc. (NYSE: SNAP) and its flagship app Snapchat have struggled over the past few years, leading many to speculate that the platform could soon go the way of MySpace. After SNAP share price peaked above $80 in late 2021, the stock dropped to around $10 per share over the course of a year.

While 2022 was tough for tech stocks as a whole, SNAP hasn’t bounced back this year. The stock is currently up around 5% year-to-date, underperforming the S&P 500 and many of its competitors so far.

But there have been some signs of life out of Snap in recent months. The most telling is the 5% year-over-year increase in revenue in the 3rd quarter of this year. That, coupled with the company’s growing AI and subscription services, has gotten some investors excited again.

So is Snap stock undervalued?

Why Are Snapchat Shares So Low?

The main reason why SNAP dropped was a declining trend in earnings per share that resulted in the company failing to reach profitability over the past year.

Snapchat has largely been eclipsed in popularity by other platforms, and the company hasn’t been able to demonstrate that it has a solid plan moving forward back into the black.

Until this quarter, Snap had been slightly underperforming against revenue estimates. And even though sales growth is a good sign, the company still issued a warning that the 4th quarter of 2023 might not be so rosy.

Concerned that the war in Israel might affect advertising revenue, Snap declined to give guidance on where sales might be by the end of the year.

The company has already seen some prominent brands halt campaigns due to uncertainty in the region. Still, analysts believe that Snap will continue to increase sales next quarter.

Is Snap Still a Good Investment?

Due to the drop in stock price and the company’s potential for growth, investors are starting to kick the tires on SNAP again. In the company’s 3rd quarter of 2023 earnings release, Snap announced impressive daily active user growth of 12% compared to the same quarter of 2022.

Despite increased revenue and users, the company reported a net loss of $368 million for the quarter, which was up 2% from $360 million the previous year. However, Snap still has $3.6 billion in cash, cash equivalents, and marketable securities combined.

The main question for potential investors is where Snap will go from here. The company’s $3.99-a-month subscription service, SnapChat+, gained a million more subscribers over the past quarter. Now boasting 5 million users, the premium service’s additional features have hit home with many fans.

There’s also potential user and revenue growth through the company’s new AI chatbot, My AI. Since its launch, Snap claims that over 200 million users have used the chatbot to send over 20 billion messages. Users can chat with My AI and receive personalized recommendations from the software.

Is Snap Expected To Go Up?

Despite these positive indicators, analysts have been reluctant to endorse Snap stock. Out of 41 analysts who have issued ratings on the stock, 30 label SNAP as a hold at this point. The median forecast has the stock improving by 7.6% over the next 12 months.

There are a handful of analysts who believe SNAP can turn around its fortunes. Six analysts have issued Buy ratings, and three of those forecast the stock to outperform the market. The most bullish prediction has Snap shares jumping by 61.5% to $15 over the next 52 weeks.

There are nearly an equal amount of naysayers, however, with 5 analysts advising investors to sell. One of those analysts believes SNAP will underperform the market over the coming year, and drop by nearly 25% to $7.

Is Snap Stock Undervalued?

The fact that analysts’ ratings are nearly split across the board is a testament to the uncertainty around the stock’s future. The company’s price-to-sales ratio of around 3x may not attract many investors on its own. Still, it’s substantially lower than the tech industry at large, where the average P/S value is around 6x.

Snap is 21.8% undervalued according to the consensus ratings of analysts with fair value sitting at $10.22 per share.

Snap’s valuation really hinges on whether it can continue to build subscribers, and whether it will be able to draw new users to its products. There has already been some pushback against My AI. Many parents have raised concerns about their children’s privacy and about inappropriate responses from the chatbot. So far, there hasn’t been the backlash against the app that many investors feared.

A positive sign for the company was the announcement that Snap plans to buy back $500 million in stock. While that’s a sign of strength for long-term investors, there is still a lot of doubt about the company’s current valuation.

What Will Snap Be Worth in 2025?

Snap, Inc is a social media company that experienced significant growth in users and in its stock price into 2021. 2022 was just as hard, if not harder, on Snap as it was on most tech companies, but investors have been reluctant to buy back in so far.

There have been too many questions surrounding the company’s plan for the future, and until this quarter Snap’s revenues had stagnated. And the company tempered expectations for the 4th quarter due to an advertising purchase slowdown because of the war in Israel.

It all leads up to a mixed bag for investors looking to buy SNAP. On one hand, the company has managed to increase users and revenue, and the advertising slowdown could be a short-lived issue. If Snapchat+ and My AI can continue to drive revenue, the stock could be poised to bounce back dramatically by 2025.

A 5-year discounted cash flow forecast places fair value of Snap at $9.07 per share, so the next couple of years does not appear to be rosy when examining the financials alone.

At this point, though, there are too many lingering questions around the stock to forecast its future with accuracy.

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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.