Powerful Free Cash Flow Can Push SNAP Stock Much Higher

  • Snap Inc (SNAP) stock is off significantly from its highs and from the end of the year, but from its lows SNAP stock is up 50%.
  • The camera application and software app company just had its first full year of positive free cash flow (FCF).
  • This augurs well for the stock going forward, especially now that analysts forecast higher revenue, earnings and FCF.
An apple iPhone showing the snapchat application alongside other snapchat logos

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Snap Inc (NYSE:SNAP) has definitely turned a corner with its latest stellar earnings release on Feb. 3. Snap is now back to profitability after having suffered losses in Q3 earnings from the Apple (NASDAQ:AAPL) iOS advertising changes. That could push SNAP stock significantly higher from here.

In fact, SNAP stock is now up 50% from its low price of $24.50 on Feb. 3, as of March 30, when it closed at $36.84 per share. However, it is still down a good deal from its former highs of over $83 per share in September 2021. So it has a long way to go.

Nevertheless, SNAP is likely to do much better for the rest of the year. This is based on the fact that the company has now turned free cash flow (FCF) positive. Its profitability should pull the stock higher.

Ticker Company Current Price
SNAP Snap Inc $36.84

Where Things Stand With Snap’s Free Cash Flow

The company is still on a growth surge. Its revenue in Q4 rose 42% to $1.3 billion year-over-year (YoY). Moreover, its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) almost doubled to $326.7 million in Q4 2021.

But even more importantly, the company reported that its free cash flow (FCF) was positive for the quarter and reached $160.96 million. This compared to a negative $68.99 million in the prior-year quarter. However, the prior quarter (Q3) shows that Snap had already turned positive in the amount of $51.716 million. So in the space of one quarter, it had increased from $51.7 million to $161 million.

Moreover, the FCF margin in Q4 was very high. It produced revenue of $1.29 billion and its FCF of $160.96 million works out to 12.4% in Q4. This was up from 4.84% in Q3, more than doubling, as revenue grew 21.6% quarter-over-quarter (QoQ).

In other words, as revenue grew its FCF grew much more. This seems to imply that its costs are not going to rise in correlation with the rise of revenue. As a result, FCF can spike much faster.

For example, analysts now expect that in 2022 revenue will rise to $5.66 billion, up 37% from $4.12 billion in 2021. And in 2023, analysts forecast revenue could hit $8.05 billion.

That implies that the FCF margin could easily double from here. For example, by the end of 2023, the FCF could double or more to 25% on $8.05 billion in sales. That would raise FCF to $2.01 billion.

This will push SNAP stock substantially higher from here.

What SNAP Stock Could Be Worth

For example, assuming that the market values SNAP stock with an FCF yield of 3%, then its target market value will be equal to $67 billion. This can be seen by dividing $2.01 billion by 3%, which results in a figure of $67 billion.

That is substantially more than the present $59.83 billion market value for Snap Inc. This implies it could rise 12%.

However, by that time, assuming Snap produces $2 billion in FCF, then the FCF yield will likely be much better than 3%. For example, that implies a P/FCF multiple of 33.33x (i.e., 1/.03=33.33x). It will likely rise to 40x or higher.

This would raise the target market value to $80 billion, or 33.7% higher than today’s market cap. This means that SNAP stock is worth 33.7% more than its price today of $36.84, or $49.26 per share.

In fact, I highly suspect that Snap will actually produce substantially more than $2 billion in FCF by 2023. The key here is to watch how fast the FCF margin is growing each quarter. If we see that its upcoming Q1 margin is higher than 12.4%, as it was during Q4, then expect that the margin could more than double by the end of 2023. That will push SNAP stock even higher than $49.26.

On the date of publication, Mark Hake did not hold (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.

Mark Hake writes about personal finance on mrhake.medium.com, Newsbreak.com and Beehiiv.com.

Article printed from InvestorPlace Media, https://investorplace.com/2022/03/powerful-free-cash-flow-can-push-snap-stock-much-higher/.

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