The company developed and maintains technological products and services, namely Snapchat, Spectacles, and Bitmoji.

So what’s going on here, and does this represent a buying opportunity for my portfolio?

Why is Snap down?

Snap reported its earnings for Q2 after the closing bell on Thursday. The company missed Wall Street’s expectations, sending shares, which were still pretty expensive, plunging 23%.

Revenue came in at $1.11bn versus analysts predictions of $1.14bn. Earnings per share came in at a loss of $00.2 versus an expected loss of $0.01, according to Refinitiv. However, on a positive note, daily active users were recorded at 347m versus 343.2m expected.

The big issue was around advertising revenue, with companies seemingly pulling back on marketing spends. The social media giant relies heavily on advertising revenue, so clearly this isn’t good news.

Snap noted several headwinds and pointed to the current economic environment, characterised by lower economic growth expectation, higher inflation, and higher interest rates which push up the cost of growth.

Average revenue per Snap user fell 4.5% year-over-year, and amid the current environment, the company decided against providing guidance on the next quarter.

“While the continued growth of our community increases the long-term opportunity for our business, our financial results for Q2 do not reflect our ambition“, CEO Evan Spiegel said in a release.

Snap’s earnings could serve as a good indicator of the health of the digital ad market in general. The news has wiped $76bn off the stock price of social media companies, according to Bloomberg.

So, is this a buy opportunity?

Does the collapse make Snap a good buying opportunity? For me, no. I still see Snap as one of the more expensive tech stocks. Snap has been growing towards profitability in recent years, but it has a price-to-earnings ratio of around 80, which is very expensive. It’s also worth remembering that Snapchat has been around for some time — it’s not a real newcomer.

This might be based on my own biases. I don’t use Snapchat and I don’t know anyone who does. Although, I do still have an account from when the app appeared to have some utility.

But, there are some positives. As noted above, the audience is growing, although I’d be interested to know more about the active user numbers. I occasionally open the app, but I don’t actively engage with it.

In June, in a bid to raise revenue, Snap announced Snapchat+ subscription service. Snapchat+ promises users access to “exclusive, experimental, and pre-release features“. It’s priced at $3.99. In all honesty, I can’t think of what useful features it might have, but maybe I’m getting old.

It’s also worth noting that Snap now has a price-to-sales ratio of around 4.5, which is pretty cheap. But if growth is falling, that won’t ease investor sentiment.

For me, it’s a stock I won’t be buying.

Updated guidance

The fact that Snap has had to reduce expectations for Q2 is extremely disappointing. This is especially the case since the guidance for the quarter didn’t seem overly optimistic either. Indeed, revenue growth was ‘only’ expected to reach around 20%, while at the low end, adjusted EBITDA was expected to be at break-even. Now, after the guidance change, it’s expected that Snap will report negative adjusted EBITDA and moderate revenue growth below 20%. For a growth stock trading at a price-to-sales ratio of around 5, this is extremely disappointing. 

There are also fears that the macroeconomic environment is likely to stay depressed for a significant amount of time. Indeed, with the dreadful war in Ukraine no nearer to a ceasefire, inflation is showing no signs of slowing down. As companies around the world attempt to cut costs to deal with this, advertising may, therefore, slow down further. As Snap relies on advertising for revenues, this is a factor that could see its stock plummet further in upcoming trading updates. 

What positives are there? 

So far, the news around Snap seems extremely negative. However, there are also some factors that could see the stock doing better over the next year or so. For example, as stated by the company in the recent update, the Snapchat “community continues to grow, and [it] continues to see strong engagement”. It also stated that there are significant opportunities to grow average revenue per user over the long term. These factors may assist the company in overcoming the macroeconomic headwinds, to help boost growth in the long term. 

Further, after the recent 40% decline, Snap is trading at historically cheap levels. For example, even though a price-to-sales (P/S) ratio of around 5 is by no means low, last year Snap had a P/S of over 50. Further, over the past three years, the lowest the company’s P/S ratio has sunk to was around 8. For some, this may indicate that now is a great time to buy the stock on the dip. 

What am I doing about Snap stock? 

I’m not too convinced about this positive viewpoint. Although Snap is trading at a historically low valuation, considering its declining growth, I still believe that it’s too expensive. Indeed, other companies that have similar P/S ratio include MercadoLibre and Sea Ltd. Albeit within a different sector to Snap, these firms are still seeing revenue growth of over 50%. Therefore, due to the social media firm’s high valuation, alongside its inability to make a sustained profit, I’m staying away from the stock.

Buy the dip

Over the past month, Salesforce (NYSE: CRM) has fallen around 12%. This was mostly due to its trading update on Tuesday evening, where the forward guidance was rather underwhelming. Indeed, for Q4, the company expects revenues of around $7.3bn, yet earnings were forecasted to be slightly lower than analysts’ expectations. This had led to fears that growth is slowing, and this caused the Salesforce share price to fall around 10% on the day. It’s still up over 18% over the past year though. 

But while the prospect of slowing growth is a real risk for the company, I still think this dip offers a great time to buy. In fact, the company’s Q3 trading update did beat expectations, and full-year revenue is expected to be around $26.4bn. This is a 24% year-on-year rise, once again showing how the company’s strategy is paying off. After the acquisition of Slack, and due to the strength of its Customer 360 platform, it also expects revenue of $50bn by FY2026.

This means that, after the company’s recent drop, and based on the recent results, it has a price-to-sales ratio of under 10. For a growth stock, this is certainly not too expensive. If the company can deliver on its ambition to reach $50bn in revenues by 2026, the share price could soar. Therefore, I’m very tempted to add Salesforce stock to my portfolio.

A growth stock to stay away from?

Snap (NYSE: SNAP) has fallen back significantly over the past few months, as it missed estimates for revenue growth. This means that the Snap share price is over 40% off its recent high, and at the same price as it was a year ago. But this dip isn’t tempting me to buy.

Although Snap has been seeing tremendous growth over the past few years, there are signs this is slowing down. Daily active users in Q3 were 306m, which is a 23% increase year-on-year. But over 75% of 13-34-year-olds in the US, UK, Australia, France, and the Netherlands already use Snapchat, so I believe that it will be hard to attract too many new users. This is a bad sign for any growth stock.

Further, the company’s valuation seems very steep. In fact, using the company’s estimates of around $4bn of revenue for this financial year, it has a forward price-to-sales ratio of around 19. This is far higher than I would like, especially as it still has not managed to reach profitability.

Therefore, even though the company is continuing to invest in itself, and revenue growth is strong, I don’t think this justifies its lofty valuation. This means that Snap is a beaten-down growth stock I won’t be adding to my portfolio.

Diving into the numbers

Despite what the Snap share price would suggest, I think the latest results were reasonably promising. Over the last three months, revenue increased by 57% compared to a year ago, reaching as high as just over $1.07bn. Meanwhile, the firm’s net loss fell by 64%. And free cash flow ventured into the black at $51.7m versus -$69.5m in 2020.

Most of this growth appears to stem from a significantly more engaged community. Daily active users during this quarter reached 306 million. By comparison, this figure was closer to 249 million a year ago, marking the fourth consecutive quarter during which Snap has achieved 20%+ growth in its active user base.

Needless to say, this all sounds quite encouraging. So why did the stock lose nearly a quarter of its value?

The fall of the Snap share price

As promising as this growth appears to be, it seems investors were simply expecting more. While earnings per share beat expectations, revenue growth came up short. Analyst forecasts had placed third-quarter revenue at $1.1bn. Meaning that Snap missed the mark by a relatively small amount.

Seeing such high volatility with a technology stock isn’t exactly surprising. After all, these shares typically trade at a high premium. So, any slowdown in growth can quickly spook the market. But have investors overreacted? That depends on what caused the slowdown.

Earlier this year, Apple announced new changes to its privacy policy. Evan Spiegel, the CEO of Snap, stated at the time that the changes would likely have an impact on performance. It seems the adverse effects were more substantial than initially anticipated, leading to the missed revenue target. But this affects all advertisement-driven businesses, so I’m not surprised to see shares of Facebook, Twitter, and The Trade Desk suffer on this earnings release as well.

An opportunity to buy?

A 25% plummet in Snap’s share price certainly looks to me like an overreaction to what was a seemingly satisfactory report. However, the catalyst behind it is ultimately out of management’s control. And I doubt Apple is going to reverse its privacy decision. The recent slowdown may be here to stay. And it seems management agrees as guidance for the fourth quarter was also lower than analyst expectations.

I’m going to keep Snap on my watchlist to see whether the company can recover its lost growth through other means.