Snap Inc

Snap Inc (NYSE: SNAP) is the owner of one of the most popular social networking apps, Snapchat.

Investment Highlights – SELL at USD 77.97

• Over the last five quarters (Q2 FY20 to Q2 FY21), the operating margin and the net margin were falling in the negative territory, while the respective industry median remained in a positive zone.
• The consensus estimates indicated that SNAP would remain loss-making for the next four quarters.
• The stock price is trading very close to the 52-week high of USD 79.18, making it difficult for the stock price to show any further upside potential.
• From a technical standpoint, the stock price is trading above the upper Bollinger band, indicating a correction in the stock price.
• Moreover, the 14-day RSI (~72.02) is suggesting the overbought zone, indicating that the stock price could decline in the near term.

Key Risks

• The client contractual risk may impact the growth trajectory of the Company.
• The rise in interest rates could cause a hurdle for SNAP to obtain funds.
• The recent changes in the Board could hamper the operations to a certain extent.

Recent News

On 25 May 2021, SNAP had appointed Darcie Henry as Chief Human Resources Officer with effect from 06 July 2021.

Q2 FY21 Financial Highlights for the three months period ended 30 June 2021 (as of 22 July 2021)

 (Source: Company Result)

• The Company had reported a growth of around 116% in the total revenue to USD 982 million during Q2 FY21.
• On the profitability front, the net loss had shown an improvement of around 53%, and adjusted EBITDA had demonstrated an improvement of about 223% during Q2 FY21.
• SNAP had shown an impressive growth of approximately 23% in Daily Active Users to 293 million.

One Year Share Price Chart

 (Source: Refinitiv; Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative) 

Conclusion

The Company had seen robust growth in the Daily Active Users across each of the geography and across both iOS and Android platforms. Moreover, SNAP had projected Q3 FY21 revenue to be ranging from USD 1.07 billion to USD 1.09 billion. The adjusted EBITDA was forecasted to fall between USD 100 million and USD 120 million during Q3 FY21. Meanwhile, the stock price had jumped more than 20% in a single day after the release of Q2 FY21 results, providing a lucrative opportunity for the investors to exit and book profit. The stock made a 52-week High and Low of USD 79.18 and USD 20.61, respectively.

Considering the weak technical indicators, consistent loss-making trend, and the unfavourable valuation method shown above, we have given a "SELL" stance on Snap Inc at the closing market price of USD 77.97 (as of 23 July 2021), while we will suggest fresh buying after identifying fresh growth catalysts for SNAP. 

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

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