Buy the Dip in Snap Before It Rebounds This Year

Snap (NYSE:SNAP) has sold off as part of the broad-based tech crash. SNAP stock slid more than 50% in the past six months. However, its business continues to fire on all cylinders with its latest blow-out results. It represents the crème-de-la-crème of social media, with plenty of upside for years to come.

smart phone in hand with Snapchat (SNAP) logo on screen

Source: franviser / Shutterstock.com

On the surface, SNAP stock may seem like a pricey proposition. Trading at more than 13 times forward sales, investors are bound to feel apprehensive. However, the massive pullback in its price has made it significantly more attractive than in the recent past.

SNAP stock trades more than 50% below its 52-week high price of $83.34. Analysts at Refinitiv believe it offers an upside of more than 50% from current levels. With multiple growth catalysts in motion and tailwinds to boot, Snap is in for another solid showing this year and for the foreseeable future.

SNAP Stock Is Bucking the Trend

Social networking companies are feeling pressure from Apple’s (NASDAQ:AAPL) iOS privacy changes. Meta Platforms’ (NASDAQ:FB) lackluster fourth-quarter results were a testament to that notion. Additionally, FB stock shed more than $200 billion of its value in one day during the quarter.

The market expected a similar fate with Snap, but the opposite transpired during its fourth quarter. The company posted $1.3 billion in revenues, representing a 42% bump from last year. Additionally, its sales surpassed analyst estimates by $100 million. Perhaps the most encouraging trend for Snap was a healthy 20% increase in daily active user growth.

Furthermore, it was the first time the business posted positive earnings per share in its history. Moreover, adjusted earnings per share (EPS) rose 135% from the prior-year period to 22 cents. Though a remarkable achievement, I feel it won’t be the main theme of its growth story. The company’s primary goal is to expand its business and rake in significant market share from some of its peers. That will likely result in repressed profit margins in the near term.

Snap guided its first-quarter revenue to fall between $1.03 billion and $1.08 billion, representing a hefty 40% growth from the prior-year quarter. Its sales forecast is perhaps the best among its social media peers.

The Fourth Quarter Was a Turning Point

Perhaps the biggest takeaway from the company’s Q4 earnings was its ability to break even for the first time. Most analysts and investors doubted its ability to generate a profit, but it has answered its critics in style.

Moreover, its cash flows continue to improve with every passing quarter. Its business is cash-flow profitable, which significantly improves its long-term outlook. Its fourth-quarter free cash flows (FCF) came in at $161 million, compared with a cash outflow of $69 million last year.

Free cash flow for the last year was $223 million. This is almost a 200% improvement and was the first year in which the company posted positive FCF.

Its business will continue flourishing with the effective management of its financial position and several investment resources. More internal funds will result in more expansion and ultimately cement the company’s footing.

The Final Word on SNAP Stock

Snap has been an anomaly in the social media space with its recent outperformance. Its robust fundamentals and long-term growth outlook point to a strong upside ahead.

Moreover, analysts believe it has plenty of room to grow in the coming months despite concerns surrounding its valuation. Hence, the recent pullback presents an exceptional opportunity to pick up its shares at a striking discount.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.


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