SNAP Chat Crashes! Is it Time to Buy or GTHO?

When does $1 million dollars equal $3.85 billion?

Snap Inc. (SNAP) reports fourth quarter revenue of $561 million while Wall Street’s gurus predicted $562 million. 1 As a result, SNAP stock got whacked. Shares tumbled 2.80 after releasing their financial report card.

SNAP finished a couple of pennies short of $19 on Tuesday, February 4th. Sellers banged the stock to a close of $16.18 at the end of Wednesday’s regular trading session, shaving nearly $4 billion from the social app’s market value.

All because of a measly million dollars?

Does the seemingly disproportionate reaction create an opportunity to pick up some SNAP on the cheap or is the selloff a sign to take profits and move on? Let’s examine.

An important, if not the most important, metric for social sites and apps is Average Revenue per User (ARU). Management reported 218 million Daily Average Users (DAU) for the last quarter of 2019 2 compared to 186 million last year. 3

While DAU’s increased 17.2%, the Average Revenue per User 2019 increased at a faster 23.94%, moving to $7.87 from $6.35 at the end of 2018. That means management is generating more money per SNAP user and increasing their margins.

Although SNAP Inc.’s costs exceeded revenue, losing money, the executive team did a good job cutting costs as a percentage of sales in 2019 compared to 2018.

  • Cost of Revenue fell to 52.22% from 67.67%
  • Research and Development to 51.5% from 65.41%
  • Sales and Marketing to 26.73% from 33.96%
  • General and Administrative Expenses to 33.86% from 40.41%.

Lower costs saved SNAP shareholders more than $740 million for 2019 versus 2018 and is a major contributor to the company’s ability to grow ARU faster than DAU. If the trend continues, it would be a major positive for the company and stockholders in 2020 and beyond.

Management did not provide full-year guidance for this year, just for the first quarter with revenue predicted “to be between $450 million and $470 million.” Analysts, on the other hand, see the company generating revenue of $2.36 billion in 2020. 4

In the last 12-months, SNAP traded at an average of 13.05 times sales (P/S), maxed out at 17.68 and a minimum of 6.67. (The price to sales numbers are higher in the preceding years, dating to its initial public offering.) If the company hits the street’s sales target, shares will trade at:

  • At $11.32 with the 12-month low P/S ratio
  • At $22.39 using the 12-month average P/S ratio
  • At $30.34 at the 12-month mac P/S ratio

As we type, investors are paying 14.66 times sales, which would price out at $25.15 using the current, 2020 revenue forecast. Meanwhile, Wall Street has a consensus, one-year price target of $19.44.

More immediately, SNAP Inc.’s daily stock chart shows the potential for more downside, perhaps to its 200-day moving average of $14.98 or support at $14ish. Any lower than $14, and $12 could come into play.

As for upside, it would not be surprising to see investors eventually bid the stock back to $18, within a few pennies of its post earnings’ open and intraday high, $18.02 and $18.07 respectively. If/when the stock closes above $18, there is some technical debris between $18 and its 52-week, intraday high of $19.57.

Conclusion: SNAP could see some continued weakness in the near-term as investors take some profits. However, the stock could be considerably higher in the next 12-months if it trades at its 12-month average price to sales ratio or higher. Investors looking to add SNAP to their portfolio might consider the stock on continued weakness as it could offer a positive reward to risk ratio.

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