Snap (NYSE:SNAP) is one of the many tech stocks that outpaced the stock market during the pandemic, only to collapse in 2022. While some tech stocks have recovered most, if not all, of their gains, I believe Snap will never reclaim its all-time high and is dead money for current investors.
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A series of bad earnings reports were easier to forgive in 2022 when many advertising companies were losing traction. However, competitors grew in 2023 while Snap continued to languish in mediocrity.
Shares are down by more than 80% from their all-time high, and things aren’t getting better for the company. I am bearish on this stock, as it is dead money in the best-case scenario.
Snap Is No Longer a Growth Stock
Growth stocks are characterized by high revenue growth and vast potential in their industries. Snap was a growth stock for several years due to its widespread adoption and immense potential.
Investors compared Snap to Meta Platforms’ (NASDAQ:META) Facebook. Meta Platforms staged an impressive recovery as revenue growth returned after a slow 2022, and artificial intelligence can push Meta Platforms higher.
However, Snap can’t say any of these things despite renewed strength across the advertising sector. Q4 revenue only increased by 5% year-over-year. Furthermore, revenue for the full year inched up by less than 1% compared to the previous year. Going from $4.602 billion to $4.606 billion isn’t what any growth investor wants to see.
Meanwhile, daily active users grew by 10% year-over-year. Still, while it’s good to have a larger customer base, it also demonstrates that Snap is not increasing its average revenue per user. If that were the case, revenue would have been up by at least 10% year-over-year.
Despite flat revenue amid a surge in the sector, Snap still trades at excessive valuation multiples. While the company’s 4x P/S ratio doesn’t look bad relative to other growth stocks, this metric isn’t the best way to gauge a company.
Shares currently trade at a forward P/E ratio above 1,000, and it’s wishful thinking to assume the company will become profitable this year or the next. That’s not the valuation I want to see from a company that is getting left behind.
The Company Is Losing Money
Sometimes, it’s okay for a company to be temporarily unprofitable. Many tech giants were unprofitable during their early years and continued to reinvest the money into their underlying businesses. Corporations can remain unprofitable as long as investors pour money into them and they demonstrate a viable path to profitability in the future.
Snap’s “Results of Operations” section of its Q4 press release reveals a $368 million net loss for the quarter. That’s 2% worse than the net loss in the same period last year. Snap doesn’t have a believable path to profitability and continues to lose money.
The continued net losses mute the impact of more users on the platform. For instance, Vine had over 200 million users at its peak before getting shut down due to a lack of profits. Snap faces the same risk, especially with Facebook and Instagram serving as viable alternatives.
The company currently has a $19 billion market cap but does not deserve that valuation. Snap is likely to return to being a penny stock in a few years. The tech company has no moat and is exhibiting the growth rates of a mature company.
Investors Can Choose Other Stocks
Investors who continue to get burned by Snap will eventually look for other choices, and there are plenty of them. Other social media stocks like Meta Platforms and Pinterest (NYSE:PINS) have comfortably outperformed Snap, although that’s not saying much.
Investors should always keep this fact in mind if a stock stays flat or declines for too long, especially when the rest of the market is rallying. CEO Evan Spiegel didn’t have much to work with for the Q4 press release, but this statement should concern investors: “Snapchat enhances relationships with friends, family, and the world, and this unique value proposition has provided a strong foundation to build our business for long-term growth.”
Enhancing relationships with friends, family, and the world is not a unique value proposition. Every social network offers this opportunity. It’s troubling that the company views a general outcome of social media usage as its unique value proposition. Snap isn’t doing enough to differentiate itself from other social networks.
Is SNAP Stock a Buy, According to Analysts?
Snap is currently rated as a Hold on TipRanks. The average SNAP stock price target of $14.30 implies 28% upside potential, but that’s after a dismal earnings report and an appropriate market reaction. The ratings tell a better story. The stock only has nine Buy ratings out of 32. Only two ratings are Sells, while 21 analysts have Hold ratings.
The Bottom Line on Snap Stock
Flat revenue growth amid a strong recovery in the sector, rising net losses, and no viable path to profitability suggest Snap can become a penny stock very soon. The company does not have a competitive advantage or a unique value proposition.
Snap did not achieve any noticeable improvements in revenue or profit margins. The company looks lost, while competing companies report exceptional financial growth. As a result, I believe the stock won’t reclaim its highs and can head lower from here.
