With Snap (SNAP -4.04%) stock soaring last week in the wake of its blowout third-quarter earnings release, the tech stock may have caught the attention of many investors. Could the social media company's strong fundamentals be a buy signal? Or has the stock's big post-earnings move more than priced in any incremental upside to the long-term investment thesis?
To understand whether or not the Snapchat parent's stock is a buy, let's first take a moment and review Snap's third-quarter update and the stock's wild ride last week.
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Strong revenue growth
After Meta Platforms (META -4.13%) disappointed investors last week with decelerating growth, an earnings miss, and weak guidance, there were some concerns in the market about Snap potentially disappointing, too. This is why Snap stock plummeted on Thursday, losing about a fourth of its value.
But worries about the company proved to be unfounded. Snap grew its revenue 42% year over year to $1.3 billion, crushing analysts' average forecast for revenue of $1.2 billion. Additionally, Snap's earnings per share was impressively positive for the first time in the company's history. Further, adjusted earnings per share increased 135% year over year to $0.22, beating a consensus analyst estimate for $0.10.
Of course, Snap stock soared the moment investors realized the issues weighing heavily on Meta Platforms didn't translate directly over to Snap's business to the same degree. Meta Platforms had said it was facing significant challenges from recent changes to ad targeting and measurement on iOS. Overall, Snap seemed less worried than Meta Platforms. Chief financial officer Derek Andersen said that its advertisers "began to recover from the initial disruption caused by the iOS platform changes and the resulting impact on the ability of our advertising partners to measure the results of their advertising investments." But the CFO did say that it expects it to take "at least a couple more quarters for our advertising partners to build full confidence in our new measurement solutions."
In the meantime, Snap remains optimistic about its ability to serve up strong growth rates. The tech company guided for first-quarter revenue to increase as much as 40% year over year in Q1.
Snap stock: Buy, sell, or hold?
While Snap's financial momentum is certainly impressive, did the stock's sharp rise last week already erase the long-term opportunity for investors who are thinking of buying shares today?
On the surface, the stock's $62 billion market capitalization does look pricey -- especially considering that the company is just now transitioning into profitability. Further, even if the company had hypothetically already reached scale and garnered a net profit margin close to Meta Platforms of 33%, Snap would be trading at about 45 times earnings today. While the stock deserves to trade at high multiples thanks to its rapid revenue growth rate, shares don't seem to be trading low enough to make the stock an obvious buy.
For now, it may be safest to call the stock a hold rather than a buy. But if the company's growth rate remains at these levels, and if profitability continues to soar, it may be worth revisiting the stock to see if it becomes an attractive buying opportunity.
