By Snap stock price has gone nowhere since 2022 as concerns about its growth and rising competition rose. It has remained between the support at $8.22 and the resistance at $17.57 in the past few years as the NASDAQ 100 and the S&P 500 indices have soared to a record high. Its market cap has dropped from over 161.5 billion to $20 billion today.
Snapchat is facing major challenges
Snap, the company behind Snapchat, is facing substantial challenges. Competition from companies like Facebook and TikTok has jumped, while its losses have mounted.
Its annual reports show that its losses have jumped to over $5 billion, a trend that is not improving.
Still, some positives are emerging. Its recent financial results show that Snap’s daily active users rose by 37 million in the third quarter to over 443 million. This is an impressive growth trajectory for a company that has been in the industry for over a decade.
The company has also expanded its business revenue sources, with the Snapchat+ service having over 12 million users, twice what it had a year earlier.
These numbers mean that the company is doing relatively well even as challenges remain. The challenge, however, is on how it can maintain its relevance at a time when the younger demographics that mostly use the app has changed.
Analysts expect that Snap’s business trajectory is heading downwards, unless it launches a new service or product. The average estimate is that the current quarter’s revenue will be $1.55 billion, a 14% increase from the same period last year.
They also expect that its revenue for the next quarter will be $1.34 billion. For the year, the average revenue growth will be $5.35 billion, followed by $6 billion in the next financial year. This growth will move from about 16% this year and 13% next year.
These estimates mean that Snap could soon become a single-digit grower in the next two years. This means that how it is valued will change since growth companies often attract a premium valuation.
Is SNAP overvalued?
The question, therefore, is on how its ideal valuation. For now, that is hard to tell since Snap is not a profitable company.
What we can do, however, is assume that it is profitable and establish its potential future profits, if it generates $6 billion in annual revenue.
Snap’s gross profit is 53%, which is much lower than Meta Platform’s 82%. Meta also has a net profit margin of 35%. Therefore, if Snap can achieve a similar margin at $6 billion revenue, it means that its net profit will be about $2.1 billion. Given its weaker gross margin, there are chances that its future net profit margin will be much lower.
Therefore, since Snap has a market cap of about $20 billion, it means that it has a hypothetical P/E ratio of 9.5, making it quite cheap. Even if the net profit margin comes in at 10%, it means that its annual profit will be about $600 million, giving it a PE ratio of about 30.
SNAP stock price analysis
The weekly chart shows that the SNAP share price has remained in a tight range for a long time. It has failed to move below the support at $8.22 several times since 2022, forming a triple-bottom. Notably, this price action resembles that of many altcoins that made a bullish breakout recently.
Therefore, while SNAP’s fundamentals are not all that strong, there is a likelihood that it will make a strong bullish breakout soon. That move will be confirmed only if it rises above the key resistance level at $17.57.
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