Yesterday, Snap (NYSE: SNAP) recorded one of its worst days as a public company, with its share price dropping around 40% as I write. This was after a note to employees said the company is likely to miss both revenue and adjusted EBITDA expectations for the second quarter of 2022 due to macroeconomic headwinds. But after falling nearly 80% over the past year, is Snap stock now far too cheap?
Updated guidance
The fact that Snap has had to reduce expectations for Q2 is extremely disappointing. This is especially the case since the guidance for the quarter didn’t seem overly optimistic either. Indeed, revenue growth was ‘only’ expected to reach around 20%, while at the low end, adjusted EBITDA was expected to be at break-even. Now, after the guidance change, it’s expected that Snap will report negative adjusted EBITDA and moderate revenue growth below 20%. For a growth stock trading at a price-to-sales ratio of around 5, this is extremely disappointing.
There are also fears that the macroeconomic environment is likely to stay depressed for a significant amount of time. Indeed, with the dreadful war in Ukraine no nearer to a ceasefire, inflation is showing no signs of slowing down. As companies around the world attempt to cut costs to deal with this, advertising may, therefore, slow down further. As Snap relies on advertising for revenues, this is a factor that could see its stock plummet further in upcoming trading updates.
What positives are there?
So far, the news around Snap seems extremely negative. However, there are also some factors that could see the stock doing better over the next year or so. For example, as stated by the company in the recent update, the Snapchat “community continues to grow, and [it] continues to see strong engagement”. It also stated that there are significant opportunities to grow average revenue per user over the long term. These factors may assist the company in overcoming the macroeconomic headwinds, to help boost growth in the long term.
Further, after the recent 40% decline, Snap is trading at historically cheap levels. For example, even though a price-to-sales (P/S) ratio of around 5 is by no means low, last year Snap had a P/S of over 50. Further, over the past three years, the lowest the company’s P/S ratio has sunk to was around 8. For some, this may indicate that now is a great time to buy the stock on the dip.
What am I doing about Snap stock?
I’m not too convinced about this positive viewpoint. Although Snap is trading at a historically low valuation, considering its declining growth, I still believe that it’s too expensive. Indeed, other companies that have similar P/S ratio include MercadoLibre and Sea Ltd. Albeit within a different sector to Snap, these firms are still seeing revenue growth of over 50%. Therefore, due to the social media firm’s high valuation, alongside its inability to make a sustained profit, I’m staying away from the stock.
