Snap (SNAP 5.20%) shares tanked after the company warned investors that the current quarter was progressing worse than expected. The stock is now down 83% off its high.
It’s no surprise that folks are curious about buying Snap. It’s common for a steep fall in valuation to attract value-conscious investors. Let’s look closer at its prospect and consider if long-term investors should start buying shares of Snap.
Macroeconomic conditions are lessening advertising demand
Snap is a social media company that is free to join and use. It boasts 332 million daily active users globally, up from 319 million in the previous quarter. Since it is free to join and use, Snap makes money by showing advertisements to users browsing the app and website. In that regard, it has done an excellent job.
The company’s revenue has grown from $404 million to $4.1 billion from 2016 to 2021. The tenfold increase results from marketers coveting the opportunity to influence Snap’s hundreds of millions of daily users. Additionally, Snap is benefiting from the advantage of digital advertising over non-digital.
Users browsing Snap on their phones, computers, and tablets are only a few clicks away from purchasing a product if they see a compelling advertisement. Compare that to radio, newspaper, billboard, or even cable TV, where consumers are further removed from the purchase point. Of course, some advertising is done solely to increase brand awareness and not compel a purchase, but for the most part, businesses advertise because they want you to make a purchase.
Marketers spent $763 billion globally in 2021, up 22.5% from the year before. Interestingly, the percentage spent on digital channels increased to 64.4% in 2021, up from 52.1% in 2019. Headwinds affecting global economies may stall or decrease ad spending in 2022.
The coronavirus pandemic is causing supply chain shortages for everything from baby formula to cars to gaming consoles. In the case of new and used cars, dealers are asking and getting consumers to pay thousands above suggested manufacturers’ retail prices. There is less need to advertise with that kind of supply and demand imbalance.
Russia’s invasion of Ukraine is making the supply chain shortages worse. And the uncertainty and fears of escalation have raised recession concerns in Europe. Marketers have undoubtedly noticed the deteriorating conditions and reduced ad spending in the region.
Indeed, these are the headwinds that Snap alluded to when it warned investors on May 23 that it would not meet the second-quarter projections it guided to on April 21. The update caused the stock to crash by more than 40% on the day following the announcement.
Is Snap stock cheap after crashing?
The short answer is no. Even after the crash, Snap’s stock is not cheap. At a price-to-sales ratio of five, Snap is the most expensive among its peers Pinterest and Meta Platforms. When compared by the price-to-free-cash-flow ratio, Snap is more than five times more expensive than its next-closest rival. Note that Twitter was left out of the conversation because of a potential buyout from Elon Musk.
So, to answer the question posed in the headline, value investors should not buy Snap stock just yet. It is still expensive even after falling significantly.