The Snap (NYSE:SNAP) stock price is up almost 200% this year alone. SNAP stock is the darling of sell-side brokers because of its latest growth numbers. But will Snapchat parent Snap ever make a profit?
The stock skyrocketed after its latest earnings release. Here’s what ignited the fire: Revenue increased 48% year-over-year to $388 million. Global average revenue per user increased 37% year-over-year and free cash flow improved $131 million year-over-year. But the reality is different if you peer a little closer into the numbers. SNAP stock is still losing lots of money, and it has performed better in the past.
For example, quarterly revenue is actually down from the fourth quarter of 2018 when it was $390 million. Global ARPU was higher in 2018’s fourth quarter at $2.18 per user against this past quarter’s $1.91.
Free cash flow and earnings before interest, taxes, debt and amortization were also better in Q4 2018. FCF was a loss of $103 million in Q2 2019 against a loss of $78 million in Q1 2019 — a 32% drop. SNAP’s quarterly adjusted EBITDA was a lower loss in Q4 2018 than in Q2 2019.
In fact, even the gross margin was higher in Q4 2018. And it had fewer users of its Snapchat app then.
I suspect the market is enamored with the possibility of future profits from its increased user base. That may be. But is Snap stock really worth $23 billion?
What Is SNAP Stock Worth?
Let’s just look at a simple number like daily active users. Right now there are 203 million DAU. Since SNAP’s market value is $23.1 billion, each DAU is valued at roughly $145. By comparison, Facebook (NASDAQ:FB) has 1.6 billion DAU and FB stock is worth $543.1 billion. So FB stock is valued by the market at $339 per DAU.
Now let us compare those numbers. Facebook has 7.8 times the number of daily active users as Snap. So logically if you divide $339 by 7.8, SNAP should have a value of $43.46 per daily active user. That $43.46 per DAU figure reduces SNAP stock’s valuation to just $8.8 billion. So at $23.1 billion, it looks like the SNAP stock price is overvalued by over $14 billion.
In other words, SNAP stock is worth roughly only $6.30 per share since it has 1.4 billion shares outstanding ($8.8 billion divided by 1.4 billion).
And this valuation may even be too generous for SNAP. Facebook is extremely profitable. Each one of its daily active users produces a profit for FB. But each of Snapchat’s is producing nothing but losses.
The Bottom Line on Snapchat Stock
I hate to be the person who points out that the emperor has no clothes on. But that is what this situation feels like with SNAP stock.
SNAP’s stock price run-up this year has gone too far. Here is what I suspect will happen. SNAP stock will probably not fall much from here, because the hype takes a while to fizzle out. But it will be a long time before Snapchat stock moves up more dramatically. In essence, the company will have to “grow into” its valuation.
For example, it is likely that Snapchat’s DAU and ARPU numbers will increase to the point where SNAP actually starts to make free cash flow profits. More advertisers will pay attention and start paying higher cost-per-thousand rates for their Snapchat ads.
And eventually Snap could make Facebook-type profits down the road. But until then, the SNAP stock price will likely stay flat or move down as analysts wake up. They will compare SNAP’s valuation to other companies like FB. They will back off of their “buy” recommendations. There may even come a point where continued growth in Snapchat’s DAU will not move the SNAP stock price higher.
Don’t fall for the SNAP stock hype.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks and was launched on Aug. 30. Subscribers during September receive a 20% discount, plus a two-week free trial.