We’ve Got One Reason To Avoid Snap Stock and One Reason to Buy It


Advertising platform Snap (NYSE:SNAP) has enjoyed the past month after reporting solid earnings. The market did not expect a blow-out quarter from the company but Snap proved them wrong. SNAP stock gained 23% in February and is trading in the $30s today.

Snapchat (SNAP) application on android cell smartphone. Snapchat is a mobile messaging application used to share photos, videos, text, and drawings.
Source: dennizn / Shutterstock.com

Although the stock is much lower than the highs it enjoyed in 2021, there is a solid chance of a rebound in the coming months. SNAP stock has gone from $25 in July 2020 to $83 in September 2021 and back to $31 today. 

With that in mind, I’d like to suggest one reason to hold SNAP stock as well as one reason to avoid the shares.

Macroeconomic Factors Could Affect SNAP Business

Top social media stocks are affected by the privacy changes and Snap will be affected by the recent Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) privacy moves. Although the company is working on ad performance measurement tools that help preserve privacy, the risk remains.

Since Snap relies on targeted advertising, the new changes will limit the sharing of user data with third parties like Snap. The changes are not going to happen immediately, it may take a couple of years for Google to implement them but they could have an impact on SNAP stock. 

Doug Anmuth, a JP Morgan analyst has recently mentioned in a research note that the invasion of Ukraine has brought about a new set of risks for the internet sector.

The analyst adds that the direct impact on social media companies will be limited but there could be a long-term impact in the form of changes in consumer behavior, brand spending activity and travel in Europe. He believes all social media companies will experience some disruption in ad revenue but Snap could be the most resilient. 

Solid Financials and Cash Flow 

When it comes to fundamentals, Snap is in a great place currently. The company reported revenue of $1.3 billion for the quarter and delivered strong growth in the user base which hit 319 million.

The results are proof that the company is not suffering as much as the other social media stocks are. It also shows the potential of Snap’s powerful business model and its ability to scale.

It is important to note that Snap’s free cash flow puts it in a strong position in the industry. The company generated $161 million in free cash flow in the fourth quarter and a total of $233 for the full year. Keep in mind, it reported a negative cash flow in 2020 so this improvement is highly significant. 

Snap is making a lot of money through advertising revenue and I do not think it is going to slow down anytime soon. Investors should note the company’s ability to go from negative cash flow to a positive cash flow in such a short time. My colleague at InvestorPlace Mark Hake explains the impact of higher FCF margins on SNAP stock. 

Bottom Line On SNAP Stock

Snap has called for revenue ranging between $1.03 billion to $1.08 billion in this quarter, which is a 37% growth at the midpoint. We might see a fall in digital advertising spending but it will affect the entire sector. Whenever social media stocks fall, SNAP stock also declines but investors should not judge the stock based on the recent decline.

Looking at the growing business and the strong financials, it is not wrong to conclude that Snap is here to stay and it will give competition to some of the biggest social media giants today.

The stock may not go as high as it did last year but it will certainly rise in the coming months. SNAP stock looks a good buy at the current price as it readies for a rebound.

On the date of publication, Vandita Jadeja 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.

Article printed from InvestorPlace Media, https://investorplace.com/2022/03/weve-got-one-reason-to-avoid-snap-stock-and-one-reason-to-buy-it/.

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