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Snap Stock Remains Rich But Will Its Sustainability Last

Snap Inc. (NYSE:SNAP) stock a camera company in North America, Europe, and internationally has offered a valuable trading lesson to investors and traders. On Feb. 3 2022, it released its fourth-quarter 2021 and full-year 2021 financial result…

Snap Inc. (NYSE:SNAP) stock a camera company in North America, Europe, and internationally has offered a valuable trading lesson to investors and traders. On Feb. 3 2022, it released its fourth-quarter 2021 and full-year 2021 financial results. Shares of Snap have had losses of approximately 42% in the past 1-year and as of Feb. 22, it is down nearly 21%.

Source: Puckpao / Shutterstock.com

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SNAP stock has a Beta (5Y Monthly) of 1.21  which makes the stock, in theory, to be 21% more volatile than the S&P 500. On Feb.3 2022 after the close of the U.S stock market, SNAP stock reported two milestones that were received as catalysts that could affect its stock price.

I consider these milestones too important, but I argue to keep the champagne in the fridge and open it later when you will have a more clear reason to celebrate.

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 Positive Operating Cash Flow and Free Cash Flow

What is the lesson I mentioned before? Straddle options can work for traders and investors as long as volatility surges, and you have luck on your side. There was something unique with SNAP stock price within two consecutive trading days in early February.

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On Feb.2, Meta Platforms, Inc. (NASDAQ:FB) announced its quarterly results that were disappointing causing a sharp selloff for its shares. On Feb.3, shares of Snap tumbled in tandem with Meta Platforms closing at $24.50 or nearly -24%. Snap after the close reported quarterly results that were better than expected. The next day on Feb.4,   shares of Snap rallied and closed at $38.91 representing a daily gain of 58.8%. Investors buying the selloff would be very happy to have this return in just one day.

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There were even happier investors or traders. The ones who bought a straddle on SNAP stock, ideally the day of Feb. 3. What is a straddle? Straddle is the simultaneous purchase of options to buy and to sell a security at a fixed price, allowing the purchaser to make a profit regardless of whether the price of the security goes up or down. What is needed is tons of volatility. The more the better.

The underlying theory is that with a straddle, one part of the trade, either the call option or the put option will become worthless, but the other part will gain so much in value that it will compensate for the risk taken and deliver a staggering return. It was the perfect timing for SNAP stock and for straddles for investors who are familiar with options trading.

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In this trading lesson, it is trivial to mention that not all straddles are either profitable or deliver a risk-free trade. On the contrary, there are no guarantees for profits but in this case, the surge in SNAP price must have been extremely profitable for some straddles.

Snap Financials

There was a second lesson to learn from Snap’s financials. Be conservative always in your estimates as reality may laugh at you one day sooner than expected. What I mean is that Snap had a history of losing money, burning cash, and having a negative free cash flow. This changed in the fourth quarter and full-year 2021. The losing money part remained for the fiscal year.

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The main highlights of Q4 2021 were a revenue increase of 42% to $1.3 billion compared to the prior year, the first quarter of positive net income as a public company of $23 million, positive operating cash flow of $186 million versus $53 million in the prior year and free cash flow of $161 million versus $69 million in the prior year.

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On the full-year 2021 financial highlights, revenue increased 64% to $4.1 billion, and it was the first full year of positive operating cash flow and free cash flow of $293 million and $223 million respectively.

Now why I am skeptical about this news? Remember telling you not to celebrate yet? Snap for the FY 2021 reported a net of $488 million in 2021, which was narrower than the net loss of $944 in 2020.

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Now ask this crucial question. What is a more indicative financial performance of a stock, a quarter, or a full year? A full year comprises of four quarters, so it is a better way to assess the improvement or not to profitability.

Other reasons of concern are that key metrics such as daily active users (DAU) and average revenue per unit (ARPU) year-over-year have both declined in Q4 2021.

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The Bottom Line

Looking at the forward valuation SNAP stock has an EV/Sales (FWD) ratio of 10.75, an EV/EBITDA (FWD) ratio of 67.43, and a Price/Sales (FWD) ratio of 10.93. The Communication Services sector has median values of 2.4, 9.15, and 1.66 for an EV/Sales (FWD), EV/EBITDA (FWD), and Price / Sales (FWD) ratios respectively. SNAP stock has a very rich premium now.

The camera company achieved milestones in its Q4 2021 and it is FY 2021. Ideally, this improvement should continue over the next quarters. I am skeptical about if this will be the real thing. Any earnings per share (EPS) miss especially after the first-ever net quarterly profit would put selling pressure to SNAP stock. It is not cheap either. If you celebrate be warned of the risks. It could be too soon to believe a moment of breakthrough has occurred.

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On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions 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.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.   

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