(Bloomberg) -- Snap Inc (NYSE:SNAP) shares are trading near their cheapest valuation on record, but a myriad of headwinds has investors doubtful over the prospect of a sustainable recovery ahead.
The Snapchat parent reports fourth-quarter results on Tuesday, and the results will serve as the season’s first major indication of the state of online advertising, a factor behind multiple recent blowups in the stock.
Besides advertisers pulling back on spending in response to a bleaker economic outlook, Snap also has struggled in the battle for ad dollars. TikTok, Alphabet (NASDAQ:GOOGL) YouTube Shorts, and Meta Platforms Inc's (NASDAQ:META) Reels have all emerged as platforms for short videos, competition that pushed JMP Securities to downgrade Snap last week. Netflix Inc's (NASDAQ:NFLX) ad-supported subscriber tier, meanwhile, represents a new way for marketers to reach millions.
“The competitive environment has intensified for Snap, which is not a great situation when coupled with a slowing demand environment,” said Brent Fredberg, director of investments at Brandes Investment Partners. The online ad sector “remains highly speculative, with more risk, and you’ll likely continue to see heavy volatility in these stocks.”
Snap’s past two earnings reports were brutal for the stock, which sank 28% the day after results in October and 39% in the wake of the July announcement, which followed a cut forecast in May. Snap averages a 20.4% move following its results, and Wall Street expects a similarly sized reaction this quarter, with the options market implying a one-day move of 21%.
The shares fell 81% in 2022 and have risen 8% this year, equal to the performance of the Nasdaq 100 Index.
Analysts predicted on average that Snap’s adjusted earnings fell by almost two thirds, with revenue up 0.5%. While that would represent the slowest revenue growth on record, the question is whether even that is too optimistic.
The Information recently reported that fourth-quarter sales at Twitter are down about 35%, and while that partially reflects advertisers pulling back from the service after Elon Musk’s purchase, Bloomberg Intelligence wrote that the scale of the drop “doesn’t bode well for other digital-ad enterprises as companies pull back on sales and marketing spending due to a tough economic backdrop.”
Analysts have lowered their estimate of Snap’s 2023 earnings by 21% over the past quarter, while the view for revenue has come down 1.6%, according to data compiled by Bloomberg.
Still, Snap looks cheap relative to its own history. The stock is trading at just 3.1 times estimated sales, not far from an all-time low hit last year and a fraction of its long-term average of almost 12. While it trades at nearly 50 times estimated earnings, the price-to-sales ratio is below that of Alphabet, Pinterest (NYSE:PINS), and the Nasdaq 100, while being about even with Meta’s.
“It’s possible Snap could start to appeal to value investors, but everything starts and ends with its prospects from a fundamental perspective,” said Scott Kessler, global sector lead for tech, media, and telecom at Third Bridge. “In addition to a weaker economy, it faces a lot of near-term and long-term issues with competition. The reality is that so far, it doesn’t seem like the steps it has taken to improve its position have worked.”
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Tesla (NASDAQ:TSLA) shares rose as much as 8% in US premarket trading after the electric-car maker reported better-than expected profits and said it was on track to deliver about 1.8 million vehicles this year. The stock has been on a tumultuous ride in recent years and January did not disappoint. If premarket gains hold, the shares are set to rise more than 50% from their intraday low of $101.81, recorded Jan. 6.
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