Personal Finance

Think Snap Is a Bargain? Think Again.

A woman with Snap Spectacles.

Many investors are attracted to stocks with low price tags. I can't tell you how many times I've seen folks refer to a stock as "cheap" because the price per share was, say, under $10, or another stock as "expensive" because the share price was $100.

The truth, though, is that whether a stock is "cheap" or "expensive" isn't about how much it costs to buy shares. Instead, it's based on how much money a company makes for each of the shares it has outstanding. A company whose shares trade at $100 but that makes $10 in net income for each of its shares is probably "cheap," while a stock that trades at, say, $5 per share but is losing money is probably expensive.

A woman with Snap Spectacles.

Image source: Snap.

An example of the latter is Snap (NYSE: SNAP) , which bills itself as a "camera company."

It's a sub-$6 stock, but...

As of this writing, a single share of Snap costs $5.71. If you have $1,000 to invest right now, you can -- after brokerage fees -- buy more than 170 shares. So while it may be tempting to think this is a "cheap" stock, a look at the company's financials reveals a much different picture.

According to current analyst estimates, Snap is on track to lose an eye-popping $0.52 per share. That loss -- if analysts are right -- isn't as bad as the $0.61 it lost per share in the prior year, but it's still ugly.

Now, judging a stock based on its price-to-earnings ratio, especially if it's not profitable, isn't the only valuation metric you should consider. One that's probably more useful for companies losing money is price-to-sales. Analysts currently expect Snap to generate $1.16 billion in revenue this year and $1.54 billion in revenue in the year after that. The further out a prediction is for, though, the less accurate it's likely to be.

That means Snap, which currently commands a market capitalization of about $7.49 billion, is trading at just shy of 6.46 times expected 2018 sales and around 4.86 times expected 2019 sales.

For reference, the leading social-media company, Facebook (NASDAQ: FB) , commands a pretty robust price-to-sales multiple; it's trading at about 6.92 times expected 2018 sales and 5.57 times estimates for its 2019 sales. So just looking at the price-to-sales metric, Snap is slightly cheaper than Facebook. However, keep in mind that Facebook is dominant in its field, generates a ton of profit, and has proved that it's not shy about lifting some of the good ideas that its competitors -- like Snap -- develop and implementing them in its own platforms.

For me to even begin to entertain the idea that Snap is a "cheap" stock, it'd at least have to be trading at a significant price-to-sales discount to, say, Facebook, given the number of disadvantages it has relative to its much larger peer.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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