Snap's (SNAP +3.62%) Snapchat is a popular social media app that intends to make the camera more fun. The stock is down considerably off its highs as it grapples with headwinds slowing revenue growth.
Still, despite the struggles, Snap is increasing revenue and daily active users briskly. With that backdrop, it's understandable that investors are curious whether Snap stock is a buy right now. To answer that question, let's consider its prospects and weigh them against its valuation to decide.
NYSE: SNAP
Key Data Points
Snap is growing rapidly, but the expansion is at risk
Like other social media apps, Snapchat is free to join and use. The company makes money by showing advertisements to users browsing the platform. In that regard, it has done an excellent job, growing revenue from $59 million to $4.1 billion between 2015 and 2021.
Snap boasts 332 million daily active users, representing an increase of 13 million from the previous quarter. User growth is critical because advertisers pay to influence people's purchasing decisions. The more people to potentially affect, the more marketers are willing to pay.
Snap has yet to consistently achieve profits on the bottom line as it invests in features to attract users and tools to optimize advertising capabilities. That said, Snap has lowered operating losses from a peak of $3.5 billion in 2017 to $702 million in 2021.
SNAP Revenue (Quarterly YoY Growth) data by YCharts.
Snap's brisk pace of revenue growth may be slowed in the near term as it adjusts to privacy policy changes implemented by Apple that make it harder to collect user data. That information has been critical in its ability to sell targeted ads. Marketers prefer precision ads because it reduces wasteful spending.
Snap's stock is too expensive to buy now
SNAP Price to Free Cash Flow data by YCharts.
Snap is the most expensive among its peer group of social media companies, including Meta Platforms (META 0.55%) and Pinterest (PINS +2.85%). Snap trades at a price-to-sales ratio of 5.4 while Pinterest sells for 5.2 and Meta for 4.1. The price differential is magnified when you look at the price-to-free-cash-flow metric, where Snap is more than five times pricier than Pinterest and nearly 10 times that of Meta (see chart above).
Admittedly, Snap is growing the top line faster than its rivals, but arguably not enough to justify the premium to its peers. Therefore, given the social media industry's headwinds from privacy policy changes and Snap's expensive valuation, the stock is not a good buy right now.
