Snap Inc. (NYSE:SNAP) seems to have turned a corner with its latest stellar earnings release on Feb. 3. It showed the company has gotten its earnings back on track after having suffered in its Q3 earnings from the Apple iOS advertising changes. As a result, SNAP stock is well off of its lows and looks poised to do much better for the rest of the year.
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SNAP stock bottomed out at $24.50 on Feb. 3, but as of Feb. 10, it had skyrocketed to $40.62, up 65.8%. However, year-to-date (YTD) the stock is still down 13.6% from $47.03 where it ended on Dec. 31.
Nevertheless, the stock looks like it could rebound further from here, especially if its financials continue to bloom as they did during Q4.
Where Things Stand With Snap, Inc.
Snap reported that its revenue, all of it from digital ad sales, increased 64% year-over-year (YoY) to $4.1 billion in 2021. This includes a revenue gain of 42% to $1.3 billion in Q4, 2021.
But more importantly, Snap is now producing large amounts of free cash flow (FCF). It was $161 million in Q4 2021, compared to $(69) million in the prior year. By the end of 2021, it produced $223 million in FCF. So most of the FCF during the year was in Q4.
In other words, the company seems to have fixed its issues with the complications from the iOS operating system. As a result, its FCF margin rose to 12.4% in Q4 (i.e., $161m/$1,297m in revenue). The company also said that its adj. EBITDA margin rose to 25% in Q4.
This was a result of an uptick in its broad social media metrics. For example, its daily active users (DAU) count rose to 319 million, a 20% gain YoY.
Moreover, and probably more importantly, its ARPU (average revenue per user) rose 18% YoY from $3.44 to $4.06. This can be seen on page 9 of its slide deck presentation along with other higher metrics.
Where This Leaves SNAP’s Value
As of Feb. 10, SNAP had a market capitalization of $65.1 billion. Analysts forecast that revenue this year could rise 37.1% to $5.65 billion. Next year, the company is forecast to have sales of over $8 billion ($8.05b), up another 42.5%.
So, in the space of the next two years, Snap will almost double its sales (+95.4%), if analysts’ projections come to pass. That could lead to a much higher stock price.
For example, if we assume that by 2023 the company makes a 20% margin on $8.05 billion in sales, the free cash flow will reach $1.61 billion.
So if we use a 2% FCF yield metric to value Snap stock, its target value should be $80.5 billion. That is 23.7% higher than Feb. 10’s $65.1 market cap. This implies that SNAP stock is worth 23.7% more than its price of $40.62 on Feb. 10., or $50.25 per share.
And this is just a minimum expectation. For example, if the company makes a higher FCF margin than 20% or if the market decides to value it at 1.0% FCF yield, rather than 2%, it could be worth much more.
What to Do With SNAP Stock
Analysts are now getting more positive on SNAP. They see the huge free cash flow gains the company has made and are raising their target prices.
For example, the average price target for 39 analysts surveyed by Seeking Alpha is $56.11 per share or 38% over Feb. 10’s price. In the same vein, TipRanks.com reports that there are 28 analysts and their average price target is $54.08. This is 33.1% over Feb. 10’s price.
Both of these surveys show that analysts are even more bullish on SNAP stock than I am, as my target price is only $50.25. Other analysts’ price targets are in the mid-$50 range.
It seems that the market is now catching on, especially with these stellar earnings now in the open. Value investors will look for SNAP stock to rise at least 24% more to $50.25 over the next year.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
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