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PARIS, FRANCE – MAY 12: In this photo illustration, the Snapchat app logo is … [+]
Snap (NYSE: SNAP) The shares witnessed a sharp jump after the company reported its first quarter 2020 results last week, recovering the level of ~ $ 17 observed earlier in the year. But we believe the company’s stock could drop below $ 9 in the coming months, a not-so-far-fetched idea given that it had touched a low of $ 7.89 just a month ago. We estimate that Snap’s stock price could decline to around $ 9 levels if its revenue falls 15% vs. fiscal year 19, and its price / sales value falls to around 8x levels from 13.1x at the end from fiscal year 19. This is likely to happen if the economy falls into a recession, hurting demand for online advertising on its various products. Below, we summarize a possible negative case for Snap. Our board How low can Snap’s stock go? Analyze our expectations for 2020 of the company in the negative scenario.
So what is the trigger and the probable time for this issue?
The global spread of Coronavirus has meant that companies are wary of spending cash on online advertising and want to focus more on basic expenses only. Snap’s first-quarter 2020 results have shown lower margins than in the same period last year. We expect that revenue will be affected in the second quarter of 2020 because the impact of the coronavirus began to show in March, so the first 2 months were not affected.
Specifically, we believe that the year-to-year revenue expectations shaped by the market as the coronavirus impact clears up may be closer to $ 1.5 billion, approximately 87.5% more than its 2017 revenue of $ 0.8 billion. , but 15% lower than 2019 revenue of $ 1.7 billion. A separate panel shows the key components of Snap’s revenue in our baseline scenario.
There could be a knee-jerk investor reaction that could trigger another selloff, and Snap’s P / S multiple is likely to drop by about 38% from the current level of 12.9x to 8x. This would mean a double hit of 15% lower revenue and 38% lower P / S multiples, translating to a Snap price drop of about 45%, to about $ 9 or less. In fact, it would be useful to note that the company’s P / S multiple was 6 times more recent at the end of 2018, and almost reached 7 times in mid-March. Therefore, we cannot rule out a steeper decline to say $ 6.50 in the near future.
Will such a fall be justified? Absolutely not. However, first time investors out of a panic sell situation take a minor hit to their portfolio.
We believe that these trends are likely to reverse in the final quarters of 2020, and as the Coronavirus crisis dominates late in the second quarter, higher expectations for revenue and earnings will replace the dire scenarios that are easily imagined in difficult times. That said, actual recovery and its timing depend on the broader containment of the spread of the coronavirus. Our board forecast COVID-19 cases in the United States with cross-country comparisons analysis expected recovery times and possible spread of the virus
Also, our dashboard -28% drop in Coronavirus vs. 4 historical accidents builds a complete macro image. In addition, the full coronavirus synchronization and impact analysis suite is available here.
While Snap’s shares could drop to $ 9 or less due to lower online advertising revenue, this could have a pronounced impact on pairs. Facebook too.
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