Why Shares Of Snap Inc. Are Down By 4% Today?

Snap Inc. Video 26.04.21.

Snap Pulls Back

Shares of Snap found themselves under pressure as the stock lost positive momentum which was gained after the quarterly earnings report that was released at the end of the previous week.

On Friday, shares of Snap moved higher as the market reacted to the quarterly report which beat analyst estimates on both earnings and revenue.

The company reported that daily active users increased by 22% year-over-year to 280 million.  Meanwhile, free cash flow totaled $126 million in the first quarter of 2021, which was the first quarter of positive free cash flow for Snap as a public company.

Snap stated that it expected to report revenue of $820 million – $840 million in the second quarter of 2021, up from $770 million in the first quarter. The company expects to report Adjusted EBITDA between -$20 million and breakeven.

What’s Next For Snap?

Reaching positive free cash flow was a big milestone for Snap. However, it looks that the market is starting to pay more attention to valuations as S&P 500 is at record highs.

Analysts expect that Snap will report earnings of $0.20 per share in 2021. Earnings are projected to increase to 0.65 per share in 2022, so the stock is trading at roughly 90 forward P/E at current levels.

This is a very rich valuation so Snap will have to show significant growth to justify current stock price levels. It remains to be seen whether the company will be able to develop sufficient momentum as the world slowly gets back to normal which may hurt growth of companies which benefited from increased demand for digital services during the pandemic.

At this point, multiple compression is the main risk for Snap investors. If Snap fails to show rapid growth after a very strong 2020, the valuation premium that the market is ready to pay for the stock will decrease, and Snap shares may gain significant downside momentum.

At the same time, it should be noted that demand for high-growth tech stocks remains solid, so Snap stock has decent chances to get back to the upside mode in the upcoming weeks.

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