- Snapchat (SNAP) stock has started to make a recovery after declining 50%-plus since September 2021.
- Snapchat is still highly overvalued, and the recovery could be a dead cat bounce influenced by the broader market.
- Investors should avoid investing a significant amount in Snapchat until the first-quarter report.
Snapchat (NYSE:SNAP) saw impressive growth during the coronavirus pandemic. The stock reached over $83 in late September 2021 before declining over 50%. Since then, SNAP stock has made a recovery of nearly 25% in the past few weeks.
Snapchat has also seen remarkable growth in revenue and the company made a profit in the last quarter after years of losses using generally accepted accounting principles (GAAP). However, despite its successes, the current revenue is still too low to justify its market capitalization.
Snapchat reported a gross revenue of $4.1 billion last year and turned a profit of $23 million in the final quarter. However, the market capitalization of SNAP is over $60 billion, and it can still decline considerably in the short term.
Snapchat Stock Forecast Offers Long Term Profits
According to Alphaspread, the average Wall Street forecast for SNAP is a 47% upside in 12 months. These forecasts certainly look great, but it is essential to remember that these metrics are evaluated based on the assumption that markets will remain normal and consistent throughout the rest of the year.
Unfortunately, that is unlikely to be the case due to the current condition of the world economy.
The economy faces unsustainable inflation levels, and some short-term turbulence should be considered when investing in high-risk stocks such as SNAP.
Moreover, SNAP stock is already quite overvalued at its current price. The intrinsic value is around 50% of the current price. In the worst-case scenario, SNAP is overvalued by 78%, and even in the best-case scenario, it is still overvalued by 8%.
Of course, not all stocks are the same. Some stocks can still outperform despite being classified as “overvalued” by traditional metrics. Admittedly, Snapchat has rapidly improved its average revenue per user (ARPU). The growth rate of its revenue is also relatively high, which has likely caused Snapchat to have a higher market cap than many of its peers.
Thus, it is likely that SNAP will be profitable in the long term.
Why Snapchat Stock Should Be a Long Term Investment
Snapchat has to consistently grow and compete with Meta’s (NASDAQ:FB) Facebook, and TikTok. Fortunately, it seems to be succeeding in that goal.
Snapchat’s monthly active userbase has grown to 530 million from 347 million just two years before. It is great news for SNAP since the primary source of revenue for Snapchat is advertising, and more users can positively affect revenue.
Moreover, as I’ve mentioned before, Snapchat has also been improving its ARPU significantly. If it continues to capitalize on its userbase, the significant disparity between its revenue and market cap will likely shrink. The current ARPU of of Snapchat also has a lot more room to grow. Snapchat’s ARPU is still around a third of Facebook’s ARPU.
In addition, the free cash flow (FCF) for Snapchat turned positive in the last quarter. Q4 2021 saw a 333% increase in FCF compared to Q4 2020. These metrics are very promising for long-term profitability concerning Snapchat.
Should You Buy Snapchat?
I believe that Snapchat is certainly a buy in the long term. However, the stock possesses some short-term risk, and you should not make a significant lump sump investment right now.
As we’ve seen with stocks such as FB and even SNAP before, these stocks can be very volatile in the short term when there is a less-than-expected increase in revenue, ARPU, or MAU.
For SNAP stock, expectations are undoubtedly high due to its strong performance in Q4 2021, and a shortfall of these expectations would be nasty for the stock. Thus, I believe that it would be wiser to wait until Snapchat reports the first-quarter results for 2022 before investing a significant amount in the stock.
On the date of publication, Omor Ibne Ehsan 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.