Snap (NYSE:SNAP) is now producing large amounts of free cash flow (FCF), as seen in its latest stellar earnings release on Feb. 3. As a result, SNAP stock could be due for a rebound once investors realize that the company could be a good cash flow generator.
Assuming there is no recession on the horizon, the stock looks like it has been unduly punished. For example, SNAP stock is down about 30% at $33.09 as of Friday, March 4, from the end of last year when it closed at $47.03.
Moreover, the stock is down significantly from its peak price of $83.11 as of Sept. 24. That represents a decline of just under 60% in almost six months.
Where Things Stand With Snap
Assuming Snap produces a similar result as it did in Q4, the company should make plenty of free cash flow (FCF). On Feb. 3, 2022, Snap released its earnings for the fourth quarter and its full-year 2021 results.
For example, last quarter, Snap made $161 million in FCF. That represented a 12.4% FCF margin on its $1.297 billion in revenue in Q4. That was a lot better than the $69 million loss in FCF it made in the prior years’ quarter.
Moreover, for the full year, Snap made $233 million in FCF, compared to negative $225.5 million (an outflow of cash flow) in FCF in 2020. So its financial performance has begun to turn around and Snap is now benefiting from its ability to produce cash as opposed to spending it.
The company makes almost all of its money from advertising revenue. It seems to have fixed its issues with the complications from the iOS privacy changes. That led to many people turning on their privacy notifications which prevent Snap from being able to monetize their Snap viewing experiences.
Where This Leaves SNAP’s Value
SNAP now has a market capitalization of $65.1 billion. Analysts forecast that revenue this year could rise 37.1% to $5.65 billion. Next year, Snap is forecast to produce $8.03 billion in sales, up 42.5% YoY.
So, Snap could almost double its sales (+95.4%) in the next two years, if analysts’ projections come to pass. That could push SNAP stock higher.
One way to determine a target price is to estimate its future FCF and then put a value on that FCF. For example, let’s assume that Snap can improve its FCF margin to 20%, up from 12% this past quarter. That would raise the annual FCF will rise to $1.61 billion based on 2023 forecast sales of $8.03 billion.
So using a 2% FCF yield metric, its target value should be $80.3 billion (i.e., $1.61b/.02=$80.3b). That is 49.4% higher than its market capitalization on March 4 of $53.75, according to Yahoo Finance.
As a result, we can estimate the price target for SNAP stock at $49.44, or 49.4% higher than its price of $33.09 on March 4.
Keep in mind that this is highly speculative. It is based on a major assumption – that Snap will increase its FCF margin dramatically from 12% to 20% over the next two years. For example, if the margin rises just 33% to 16%, the price target will be lower.
That would lead to an FCF estimate of $1.285 billion (i.e., $8.03 billion x 0.16), rather than $1.61 billion. The new market value would be $64.25 billion, or just 12.2% higher than today’s price. That leads to a price target of just $37.13 per share. So you can see how very sensitive the price target is compared to small changes in the FCF margin estimate.
What To Do With SNAP Stock
Analysts are now very positive on SNAP stock. The average price target for 39 analysts at Seeking Alpha is $56.26 per share or 70% over $33.09, the price on March 4.
Similarly, TipRanks.com reports that there are 29 analysts and their average price target is $54.11. This is 63.5% over the March 4 price.
So, you can see that my original price target of $49.44 is even lower than other analysts’ targets. That is not usually the case, so this is a good sign for investors.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.