While tech stocks are grossly underperforming the broader markets in 2022, investors should consider buying quality companies at a lower mul
Feb. 7, 2022
While tech stocks are grossly underperforming the broader markets in 2022, investors should consider buying quality companies at a lower multiple. Yes, there is a chance for market sentiment to turn bearish, but as it’s impossible to time the market, it makes sense to view every significant dip as a buying opportunity.
Here, we take a look at one of the largest social media companies in Snap (NYSE: SNAP) to understand why it commands a place in your growth portfolio.
A look at Snap’s financials
Snap has taken investors on a roller coaster ride since it went public in March 2017. After listing at a premium of 44% compared to its IPO price, it lost momentum in subsequent months to fall by 75% to $6 per share in January 2019.
Snap shares touched a record high of $83.3 in September 2021 and are currently trading at $38.9, which is 53% below all-time highs. However, the stock gained a stellar 59% on Friday following its Q4 results.
In Q4 of 2021, Snap reported sales of $1.3 billion and adjusted earnings of $0.22 per share. Comparatively, analysts forecast sales of $1.2 billion and earnings of $0.10 per share in the December quarter. Further, it estimated revenue between $1.03 billion and $1.08 billion in Q1 of 2022, compared to consensus estimates of $1.02 billion.
Snap’s adjusted EBITDA almost doubled year over year to $327 million in Q4, accounting for 25% of top-line. Its operating cash flow stood at $186 million in the December quarter, compared to a negative $53 million in the year-ago period. The company’s free cash flow also improved from a negative $69 million to $161 million in the same period.
What I like about Snap
The strength of its core business allowed Snap to accelerate investments in augmented reality, which should improve user engagement over time. Its daily active users also rose by 20% year over year to 319 million in Q4, while around 200 million people engage with augmented reality on the platform every day. Snap also emphasized its optimism about enterprise demand as companies aim to leverage the former’s AR capabilities and integrate them with proprietary applications and websites.
Snap reported a positive net income as a publicly listed company for the first time, and this key metric cheered investors. Moreover, Snap’s revenue growth in Q4 and 2021 stood at 42% and 64%, respectively. It was the second consecutive year where Snap reported a positive adjusted EBITDA that stood at $617 million for 2021.
Risks to Snap’s share price
Snap is valued at a market cap of $63 billion and is expected to grow revenue by 32.6% to $5.46 billion in 2022 and by 42.6% to $7.8 billion in 2023. Comparatively, its adjusted earnings are forecast to grow from $0.5 in 2021 to $1.13 in 2023. So, SNAP stock is trading at a forward price to 2022 sales multiple of 11.53x and a price to earnings multiple of 72x, which is steep, making it vulnerable if the sell-off continues.
Snap’s growth potential
Snap’s rising DAU and improving profit margins make it a top bet right now. Its also trading at a discount of 55% compared to consensus price target estimates.