Is Snap's Stock Overvalued Or Undervalued?

Snap Inc SPAN shares have outpaced the S&P 500 in 2021, generating a year-to-date total return of 54.4%.

Snap has been putting up some impressive user growth numbers, but investors may be wondering just how much value is left in the social media giant’s stock?

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 28.2, nearly double its long-term average of 15.9.

Snap doesn’t currently have a PE ratio because the company is not profitable. In the most recent quarter, Snap reported a net loss of $151.6 million.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.3. Snap’s forward earnings multiple of 97.9 is nearly five times as high as the S&P 500 as a whole, making Snap stock look overvalued.

Snap’s forward PE ratio is also more than four times higher than its communication services sector peers, which are currently averaging a 21.1 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is currently about 0.9. Once again, without positive earnings, Snap doesn’t have a positive PEG ratio to use as a valuation gauge.

Price-to-sales ratio is another important valuation metric, particularly for unprofitable companies and growth stocks. The S&P 500’s PS ratio is currently 3.06, well above its long-term average of 1.62. Snap’s PS ratio is 36.2, more than 10 times higher than the S&P 500.

Finally, Wall Street analysts see value in Snap stock over the next 12 months. The average analyst price target among the 33 analysts covering Snap is $88, suggesting about 13.8% upside from current levels.

The Verdict: At its current price, Snap stock appears to be extremely overvalued based on a sampling of common fundamental valuation metrics.