Why Snap stock just collapsed

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

Following Meta Platforms‘ (NASDAQ: FB) flop of an earnings report last night, shares of rival social media stock Snap (NYSE: SNAP) suffered a sympathetic crash. As of 11:20 a.m. ET Thursday morning, Meta stock was down 24.5%, and Snap was down 20.5%.

So what

Meta Platforms missed on earnings, only barely beat on sales estimates for the fourth quarter of 2021, and predicted as much as a 10% sales miss for the first quarter of 2022. And that poor performance appears to have upset investors in Snap as well.  

One investor in particular, investment bank KeyBank, announced this morning that it is cutting its price target on Snap stock by more than half, and it pointed to Meta Platforms’ earnings report as part of the reason. As TheFly.com reports, KeyBank cut its Snap price target to $36 per share, and despite maintaining an overweight rating on the stock, it sees “ongoing ad measurement headwinds” driving shifts out of social media, and warns that Snap will also suffer “margin pressure from investment.”

Now what

What KeyBank really seems to be saying here is that it worries investors won’t pay as high a multiple for Snap’s sales — not that it doesn’t like the stock. Indeed, it bears repeating that KeyBank still considers Snap stock a buy, and that even the banker’s lowered price target still implies 40% upside.

Is that likely to happen? Perhaps. While Snap remains deeply unprofitable based on generally accepted accounting principles (GAAP), the company is finally approaching break-even free cash flow (FCF), burning only $7 million in cash over the last 12 months — versus more than $700 million burned in 2018, for example.

Analysts forecast Snap to report that full-year FCF finally turned positive in 2021, and will grow rapidly toward $3.1 billion in real cash profits by 2025 — meaning that Snap stock currently costs only about 13 times its cash profits three years from now.

If that’s how things actually turn out, I suspect that come 2025, investors will look back at KeyBank’s “buy” call on Snap stock today and realize it was right. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Snap stock just collapsed appeared first on The Motley Fool Australia.

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Rich Smith has no position in any of the stocks mentioned. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Meta Platforms, Inc. The Motley Fool Australia has recommended Meta Platforms, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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