Shares of Snap (NASDAQ: SNAP) dropped 30.8% in January, according to data from S&P Global Market Intelligence. Snap made some news in the month regarding some legal matters and content deals. Some negative analyst commentary about the competitive impact of TikTok also crept into the narrative. However, none of that was meaningful enough to explain a 31% change in the company’s value, so the losses have to be attributed to market forces. The tech sector and growth stocks are getting slammed by ongoing rotation toward value stocks and lower-risk asset classes.
During the pandemic bull market, Snap charged to a price-to-sales ratio above 40 and forward price-to-earnings (P/E) ratio above 200. Those are both high relative to the market in general, and the stock was also expensive relative to its own historical levels. It exited January with a more modest 12.5 price-to-sales and 66 forward P/E ratio.
That might be tough for investors to process. The company’s fundamentals were more or less fine, but the stock took a beating due to no fault of its own. Long-term investors should do their best to ignore temporary market fluctuations and focus instead on the business prospects over a longer time frame. Still, that does nothing to allay concerns that things could keep going south, even if Snap does nothing to warrant that.
Luckily for Snap investors, the first week of February was an eventful one. The stock staged a monster rally on the back of a fantastic earnings report. Snap is now only down 17% year-to-date, and its forward P/E ratio is back to nearly 80 again.
It’s tough to make a definitive case one way or the other for Snap. There’s undeniably big potential, but it comes with serious risk. The past few years haven’t been all smooth sailing for Snap. It’s dealing with operational challenges ranging from intense competition to Apple hampering digital advertising revenues with its new iPhone privacy settings. Its valuation rose to unsustainable levels, setting the stage for serious short-term volatility. Under the current market conditions, those risks are all still on the table.
However, this is still a great growth opportunity — if the story pans out. Snap’s sales grew 42% last quarter, and Wall Street is calling for a similar rate of expansion next year. Its virtual and augmented reality software makes it an interesting long-term play for investors who are bullish about the metaverse. This business could absolutely appreciate far beyond its current $62 billion market cap over the next five to 10 years. However, it could be tough sledding along the way, and we’ve seen time and again how quickly social media platforms can fade into obscurity.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool owns and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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