Snap’s stock price has taken a beating over the past six months, shedding 42.7% of its value and falling to $4.69 per share. This might have investors contemplating their next move.
Following the pullback, is this a buying opportunity for SNAP? Find out in our full research report, it’s free.
Why Is Snap a Good Business?
Founded by Stanford University students Evan Spiegel, Reggie Brown, and Bobby Murphy, and originally called Picaboo, Snapchat (NYSE: SNAP) is an image centric social media network.
1. EBITDA Margin Reveals a Well-Run Organization
Operating income is often evaluated to assess a company’s underlying profitability. In a similar vein, EBITDA is used to analyze consumer internet companies because it excludes various one-time or non-cash expenses (depreciation), providing a clearer view of the business’s profit potential.
Snap has been an efficient company over the last two years. It was one of the more profitable businesses in the consumer internet sector, boasting an average EBITDA margin of 11.9%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.
2. Outstanding Long-Term EPS Growth
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Snap’s EPS grew at 24.5% compounded annual growth rate over the last three years, higher than its 10.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
3. Increasing Free Cash Flow Margin Juices Financials
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Snap’s margin expanded by 8.8 percentage points over the last few years. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Snap’s free cash flow margin for the trailing 12 months was 10%.
Final Judgment
These are just a few reasons why we’re bullish on Snap. After the recent drawdown, the stock trades at 6.9× forward EV/EBITDA (or $4.69 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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