Snap Inc.

Snap Inc. (NYSE: SNAP) is a camera company whose principal product is Snapchat, a camera software that allows users to interact via short videos and photographs known as Snaps. Snapchat includes five parts (Camera, Communication, Snap Map, Stories, and Spotlight) and additional capabilities that work outside of the app. Most of its revenue is generated by selling advertising products such as Snap Ads and AR Ads. This is known as advertising revenue.

Why Should Investors Exit?

• Lower ARPU: The company reported an average revenue per customer of USD 3.49 in Q3FY21, compared to the industry median of USD 6.75. Despite increasing active users, the company is still not generating enough revenue from its user base.
• Margin Stress: The company reported gross margins of 58.5% in Q3FY21 (ended September 30, 2021) compared to the industry Median of 72.2%, indicating significant stress on the topline performance. Further, the company reported a net loss of USD 71.96 million in Q3FY21.
• Leveraged Balance Sheet: The company is more exposed to balance sheet risk than its peers, with a Debt/Equity ratio of 0.65x as of September 30, 2021, compared to the industry norm of 0.07x. Furthermore, its long-term debt-to-total-capital ratio was 39.6%, compared to the industry average of 18.6% for the same period. These leveraged financials put the corporation at risk of huge swings due to the slightest adjustment in interest rates.
• Technical Weakness: On the daily chart, SNAP prices are sustaining below the downward sloping trend line and facing the same resistance. Moreover, the momentum oscillator RSI (14-period) is trading at ~35.10 level, showing that stock is in the oversold zone. However, the prices are trading below the trend-following indicators 21-period and 50- period SMA, which may be a resistance level for the stock.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

SNAP's stock price has fallen 58.52% in the past six months and might fall even further from current levels. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 25.00.

Considering the company's leveraged balance sheet, a decline in revenue metrics, margin pressure, current valuation, and other technical indicators, we recommend a "Sell" rating on the stock at the closing price of USD 32.07 as of February 02, 2022.

Three-Year Technical Price Chart (as of February 02, 2022). Analysis by Kalkine Group

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

* All forecasted figures and industry information have been taken from REFINITIV.