Snapchat Growth

Why Has Snapchat Grown In The Stock Market?

Anyone today who is an active social media user is familiar with Snapchat, whether it’s adding your friends who have different devices or being able to talk to people from around the world. Snapchat is a leading industry in the social media market. Not only does it have 293 million daily users, but it has had a 278% increase in stock price over the past year. Let’s take a deeper look at what has caused this recent boom in stock price.

Back in October of 2020 Snapchat introduced some brand new features, such as including lenses, sounds, and creator profiles, and improved their ad platform in order to create more revenue. Their daily users also increased by 18% gaining 39 million new users.

What really jump-started their boom over the year was their surprising Wolf Street analytics by outperforming their predictions. Analytics predicted that Snapchat would have an (1)EPS at -.05, when in fact snapchat reported 0.01 EPS, which allowed them to have a positive (2)P/E ratio for that quarter. These reports increased their stock price by 160% in nearly 10 days. This was the first part that started their boom.

Fast forward to June of 2021, snapchat has reported revenue of 982.1 million dollars after consistently reporting revenue of more than 750 million since october, while keeping cost of revenue to roughly 400million. Snapchat has managed to accumulate 2.05 billion dollars of cash on hand this year. This is very important because at the beginning of the year snapchat reported that they had 1 billion dollars of debt. Reaching double of their current debt is very healthy for the company and is a very good sign.

While Snapchat has had recent success, it has been shown to be overvalued. The P/E ratio based on the EPS (3) TTM, is 374.75x. The average for the internet software industry is 56.93x which puts Snapchat extremely overvalued compared to other companies in its industry. While it is currently overvalued, the company is releasing it’s Q3 reports for 2021 on October 21st. I wouldn’t put it past the company to surprise analytics once again and report a higher EPS that will lower its P/E ratio. If this does occur, I would be looking towards Snapchat as your next investment.

1) EPS means earnings per share, a eps of .50 means that for every share your ownership of the company gets 50 cents of the profit.

2) P/E ratio means price to earnings ratio. A P/E ratio determines how many stocks you have to own in order to get $1 of profit, as well as it is an estimate of how long it will take you to double your earnings if the stock follows trends. A P/E Ratio of 7x means it will take 7 years at the current trends to double your earnings. The main function of a P/E ratio is to compare a stock to other companies in the same industry to determine if the stock is overvalued or undervalued.

3) TTM stands for trailing twelve months.

By: Joseph D. Calaprico