Snap Inc.: Mixed Signals Amid Slowing Growth and Financial Challenges

Snap: Pessimism From Weak Q3 Guidance Is Baked In (SNAP)

In the meantime, the stock is extremely oversold at current levels, and my valuation assumptions suggest near-term upside. Therefore, I will maintain my "buy" rating with a drastically reduced price target. I initiated a "buy" rating on Snap (NYSE:SNAP) in June, where my thesis was predicated on my belief that the stock should see upside from growing DAUs (Daily Active Users) and higher user monetization as the company drives innovation on deepening user engagement and growing its advertising business. However, this is probably my worst call, as the stock is down 43% since my price at publication, where the company failed to impress investors in its latest Q2 FY24 earnings report. While the company continued to expand its overall profitability, with Adjusted EBITDA growing to $55M, it saw its revenue miss analyst estimates from weakness in brand-oriented advertising affecting the growth of its North American market, which contributed 62% to overall revenue. While the management sounded optimistic on its DAUs growing to an all-time high of 432M as it drives AR (Augmented Reality) based product innovation to boost engagement along with progress in its DR (Direct Response) advertising solutions, where total active advertisers doubled on a year-over-year basis, investors are concerned about stagnating DAUs in North America along with lackluster Q3 revenue guidance. With Evan Spiegel, CEO of Snap, admitting that its advertising business is growing at a slower pace relative to competitors, the business outlook has since worsened, calling for caution until the company can execute a comeback to reinstate investor confidence. However, in the meantime, the stock has gotten oversold at its current levels, with investors pricing it at a price-to-earnings multiple of 15-16 for its estimated FY26 earnings. After assessing both the "good" and the "bad," I have decided that I will maintain my "buy" rating but have drastically reduced my price target to $12.6 for investors who want to initiate a small position. But I would like to reiterate that, from a sentiment perspective, I have turned cautious on the company. Snap reported its Q2 FY24 earnings in early August, where its revenue grew 16% YoY to $1.237B at a slower pace than the previous quarter and missed analyst estimates. Although the company saw a 9% YoY growth in its DAUs along with a management that sounded optimistic on the progress made on DR, where the total active advertisers more than doubled with momentum in their 7-0 Pixel Purchase Optimization coupled with Snapchat+ also reaching 11M subscribers, the company saw its brand-oriented advertising drop 1% YoY due to weakness in certain consumer discretionary verticals. At the same time, when you take a deeper look at the data, Snap's growth rate of DAUs in North America has stagnated at 0% YoY. While NA DAUs contribute approximately 23% to Total DAUs, with the remaining 77% of DAUs generated from Europe and the Rest of the World, I would like to point out that the NA DAUs carry a significantly higher weight when it comes to overall revenue contribution. In Q2, NA DAUs contributed over 62% of total revenue, with ARPU (Average Revenue Per User) growing 12% YoY. What we need to be paying attention to in the coming quarters is whether the stagnation of NA DAUs reverts back to growth because if it fails to, it will ultimately affect the growth rate of NA ARPU at some point, which will spell trouble for the overall top-line growth. During the earnings call, the management reiterated their strategy to drive DAU growth and engagement by improving the way Snapchatters communicate by delivering a number of new communication features and user experience enhancements to better engage their users, such as Map Reactions, Editable Chats, and My AI Reminders, while simultaneously enhancing their iOS app performance to improve latency and camera quality. At the same time, the company is also investing in machine learning models to improve content ranking and drive personalization, which has resulted in global time spent watching content growing 25% YoY and 10% sequentially. Meanwhile, Snap is expanding their content supply by growing their creator community and working with publisher partners to bring targeted and engaging content such as Snap Nation, which is an evolution in their partnership with Live Nation (LYV) to give Snapchatters access to tour and festival experiences. Finally, when it comes to AR, the company saw Snapchatters sharing AR Lens experiences grow 12% YoY, driven by innovative GenAI Lenses and personalized AR experiences, while releasing Lens Studio 5.0, which will enable creators to generate Lenses using simple text prompts. With the Snap Partner Summit coming up on September 17, it will be important to understand how the company is driving its ongoing product innovation to build better engaged communities and power monetization opportunities. So far, we can see that its product innovations have translated into record high DAUs. However, investors will be watching for how the management maneuvers the issue of stagnating DAUs in NA, especially as its monetization of international DAUs is significantly lower than NA. Turning our focus to the advertising platform, which completes the flywheel from community to monetization, the company continued to make progress with its 7-0 Purchase Optimization Model while starting its testing with the Value Optimization Model, continuing to drive higher ROAS for advertising partners with improved privacy-centric signals and higher-performing ad formats. Simultaneously, for app-based advertisers, the company has invested to improve the entire stack while expanding their 7-0 Optimization, with early testing showing improved ROAS for advertisers. In addition, Snap continued to build compelling advertising products for their advertising partners, including AR advertising solutions to enable marketers to build engaging experiences and unlock higher performance. During the earnings call, the management sounded optimistic in terms of the progress that they are seeing with attracting SMB advertising partners, which has doubled on a year-over-year basis in Q2. However, what is slightly concerning is that its cost revenue grew 19% YoY, at a faster pace than overall revenue growth, which squeezed gross margins on a GAAP basis. This was driven by higher infrastructure costs from the ramp in AI-related investments, with infrastructure costs per DAU growing from $0.80 in Q1 to $0.81 in Q2. But what is also encouraging to see is that the company is prioritizing its operating profitability landscape as it continues to optimize their cost structure by streamlining their operating expenses by close to 8% on a GAAP basis. This resulted in an Adjusted EBITDA of $55M, which grew from a loss of -$38M in the previous year. While Adjusted EBITDA margin is still low at 4.4%, I believe their restructuring efforts should set them up for continued improvement in operating leverage as the year progresses. Furthermore, as the company sees an overall increase in ARPU, it further allows the management to better calibrate their investments to build a strong financial foundation and drive targeted innovation. Looking forward, Snap expects its DAUs to grow 8.6% YoY to 441M in Q3, which would be a slight deceleration in pace from Q2 along with revenue, which will further slow down to a year-over-year growth rate of 13.9% to $1.355B. While the management remains focused on executing improvements to their advertising platform to drive strong performance to their advertising partners, Evan Spiegel said that their advertising business is growing slower than their competitors, which include Meta's Instagram (META) and ByteDance's TikTok. In the meantime, it expects its Adjusted EBITDA to grow approximately 112% YoY to $85M, which would represent a margin expansion of over 300 basis points year-over-year to 6.3%. For the full year FY24, I will take the consensus revenue expectations into consideration, where revenue is expected to grow roughly 25% YoY. For the years after that, I will assume that revenue will grow in the mid-teens range, which sits within consensus estimates. Although I can see that there is opportunity for the company to continue driving innovation to better engage its user base while building better advertising solutions for its advertising partners, driving higher ROAS, a slowdown in expected revenue growth in the coming years would likely not be received by investors with enthusiasm, which could keep the stock under pressure. From a profitability standpoint, I will take consensus estimates for non-GAAP EPS of $0.61 for FY26, which will be growing at a much faster rate than overall revenue growth as it unlocks higher operating leverage from streamlining its operating expenses and better monetizing its user base. This will be equivalent to a present value of $0.46 in non-GAAP EPS when discounted at 8%. Currently, the stock is priced approximately at a price-to-earnings multiple of 15-16 for its projected FY26 earnings. However, when we look at the price-to-earnings multiple of the S&P 500, its 10-year average multiple is between 15 and 17, with the average growth rate of its earnings at 8%. This means that Snap is currently trading at par with the S&P 500 multiple when we take its FY26 projected earnings into account. I believe that there is room for multiple expansion given the current set of assumptions to at least 1.5 times the multiple of the S&P 500, which will translate to a PE ratio of 25 and a price target of $12.6, representing an upside of at least 40% from its current levels. While I will maintain my "buy" rating on the stock given its upside potential, I have severely reduced the price target since my previous post. In my previous post, I had outlined that the stock had likely priced in the uncertainties from its North American market. However, as per its recent earnings call, we can see that the business outlook has gotten muddied. While DAUs have reached an all-time high, NA DAUs have stagnated. Simultaneously, revenue growth is also slowing, with brand-oriented advertising declining on a year-over-year basis, hurting NA ARPU growth rate. Furthermore, its Q3 guidance points to a further slowdown in the pace of revenue growth rate. While the company is trying to innovate by driving user engagement while simultaneously building its advertiser business to drive higher ROAS with the intent of attracting more advertising spend on the platform along with expanding profitability, the truth is investors have turned sour on the fact that its advertising business is not growing nearly as fast, thus losing market share to its competitors. While I haven't invested in the stock and won't initiate a position at the moment, I can see that from a valuation perspective, the stock is extremely oversold at current levels with a strong near-term upside potential intact. As a result, I will maintain my "buy" rating for investors who may want to initiate a small position at current levels, but I will insist that from a sentiment perspective, I have turned cautious on the company.

Snap Stock: Time To Add Back To The Watch List (Rating Upgrade) (NYSE:SNAP)

The stock is now trading at <3x forward revenue. Due to its drastically reduced valuation, I'm upgrading Snap to neutral. The fact that the market is near all-time highs amid the potential for a U.S. recession later this year is a trigger, in my view, for investors to rotate more of our portfolios away from winners and more toward rebound value-oriented plays. And now toward the end of the Q2 earnings season, we've seen many companies tilt from winners to losers in the blink of an eye. Snap (NYSE:SNAP) has been one of these unfortunate companies. The disappearing-chat company has been plagued by both slowing user growth and weaker advertising demand. The company tumbled sharply after reporting dismal Q2 results, causing the stock to fall nearly 50% YTD. I last wrote a bearish note on Snap in June when the stock was trading closer to $17 per share, at the time arguing that the company's lackluster user trends, particularly in the U.S. would threaten its rally. Fast-forward to today, when the stock is substantially lower, and its new valuation warrants a change in tune. I'm upgrading Snap to a neutral rating and recommending that investors add this name to their watch lists. Yes: there are risks to acknowledge here. Competition is a major factor: the company is a social media outlet after all, and it's heavily prone to being a victim of passing fads. Alternative social media platforms like Reddit (RDDT), in particular, have been gaining plenty of steam - Reddit in particular is planning a big international push from using AI to machine translate its content into foreign languages. Against this backdrop, Snap's user traction is slowing, at the very same time that a poorer macro outlook is dampening advertiser demand. And yet at the same time, there are upside drivers to be aware of: With all this in mind, it's a great time to add Snap back to your watch list. Let's now go through Snap's latest quarterly results in greater detail. The Q2 earnings summary is shown below: Snap's revenue grew 16% y/y to $1.24 billion, missing Wall Street's expectations of $1.25 billion (+17% y/y) while also decelerating from Q1's 21% y/y pace by a huge five-point margin - hence investors' skittishness on Snap post-Q2 earnings. One of the core issues here is a slowdown in users: particularly in North America. On a year-over-year basis, the company's 100 million users actually declined by a fractional amount. The good news: the company noted that several feature additions have helped turn user engagement trends around in the region. Per CEO Evan Spiegel's remarks on the Q2 earnings call: For example, in Q2, we introduced Map Reactions that enable Snapchatters to send their favorite emojis to friends on the Snap Map to start conversations. We also launched Editable Chats, which allow Snapchatters to edit messages up to five minutes after sending them, and My AI Reminders that give Snapchatters the ability to ask for a reminder for an upcoming deadline. In addition, we are investing to enhance iOS app performance by making improvements to battery management, app and screen loading latency, and camera quality. We are also leveraging machine learning and generative AI to help our community form meaningful connections and to deliver engaging product experiences. These improvements have contributed to all-time highs in the number of daily active users sending Snaps in every region, which is an important input to sustained daily engagement. The results of these initiatives are reflected in our global community reaching 432 million Daily Active Users in Q2, an increase of 10 million quarter-over-quarter. Daily Active Users in North America was 100 million, down by less than 1% year-over-year, but up quarter-over-quarter as our initiatives to improve the way Snapchatters communicate begin to show early signs of progress." Growth in ARPU was the main driver of revenue growth in the quarter. Globally, ARPU advanced 6% y/y to $2.86. What will be key to watch, however, will be the company's ARPU expansion in the "Rest of World" region, which at $1.02 on a nominal basis is less than a fifth of what a user in North America generates. This, to me, is the biggest risk that Snapchat faces: with over 100 million users, Snap is already penetrated into over a quarter of the total U.S. and Canada population - and with new social media apps constantly on the rise, it's unlikely that Snap will find many more greenfield growth opportunities in its most lucrative region. The company will have to better monetize its Rest of World region, which is where currently user growth is concentrated. At least on the expense front, the company is keeping a tight rein. Operating expenses adjusted for stock comp actually fell -3% y/y to $596 million. This, in turn, has helped boost adjusted operating margins to 52%, up nine points y/y. In turn, adjusted EBITDA also jumped to $55 million, at a 4% margin: up eight points y/y. What makes Snap most appealing after the recent drop is its valuation. At current share prices near $9, the company trades at a market cap of $14.72 billion. After we net off the $3.08 billion of cash and $3.64 billion of convertible debt on the company's latest balance sheet, the company's resulting enterprise value is $15.28 billion. Meanwhile, for next fiscal year FY25, Wall Street analysts are expecting Snap to generate $6.09 billion in revenue, or 14% y/y growth. And if we conservatively peg the company's adjusted EBITDA margin at 6% (in line with the company's TTM margin, assuming no further improvements), adjusted EBITDA would be $365.4 million. This puts Snap's valuation multiples at: For a company that is still seeing high-teens revenue growth and has a path to further monetization in the faster-growing Rest of World region, and with profitability improvements under the hood from ongoing efficiency measures, I'd say there's a case to be made for buying Snap on the dip, especially at a <3x forward revenue multiple. Watch for an opportunistic entry point around $8.25-$8.50 here.

Snapchat Has A Weak Growth Story, I Don't Buy It (NYSE:SNAP)

Snap Inc.'s long-term growth relies on waiting out net income losses, requiring heavy financing that increases risks. Snap Inc. (NYSE:SNAP) is a social media company that operates the Snapchat app, one of the most used social media apps in the world, boasting over 432 million daily active users ("DAU"). For its shareholders, it's been a wild few years, with massive swings and very sudden movements. This is not a stock for the faint of heart. From IPO to now, it's sustained an annualized return of -12.61%. Snapchat has a lot of issues, from my perspective, that are very difficult to address and will cause the continued underperformance of SNAP in the markets and as a product. For these reasons, I am issuing SNAP a sell rating and will be avoiding exposure to it as much as possible. Social media companies like SNAP are evaluated on fairly straightforward metrics: As far as DAU is concerned, Snap is still growing at a fairly steady rate. There was a slump about five years ago, but since 2020, DAU has been up consistently. This is, at first glance, a very positive sign. I say "at first glance," because I believe this data is a little misleading. Snapchat is growing in users, but where it is growing is important context. Here is the same chart, but split by region. One of the things I've learned over the course of researching SNAP and social media companies more broadly is that user monetization varies tremendously by region. This chart is going to be important context for the next section. Snapchat has not been able to hold on to any growth momentum in this metric for the last few years, falling to below 2021 highs of over $4/user. Let's break this one down by region, too. Here, we see almost a reverse in color scheme from the regional chart in the last section. In the first chart, most of the users and growth came from outside North America and Europe. However, in this next chart, we see that the vast majority of Snapchat's revenue comes from these North American and European users. This trend holds up with other companies as well. Compared to Facebook, Snapchat's ARPU ratio between developed and developing markets is normal. *As of Q4 '23. Snapchat wasn't built with the same marketing abilities at Facebook, so we'll go easy on the sheer gap between their monetization rates here. It's far easier to serve ads because of Facebook's scrolling format. Snapchat has to be creative when it shows ads, putting them between short-form content that they advertise in the app through the "stories" page. I'm not a social media guy and was never interested in any of the stories. I don't know who they are for. Please leave a comment if there are some you like; I want to know who these things appeal to and why. The issue here is that Snap isn't growing the user base with users that pay the bills at Snap Inc. They are building tons of users that generate very little revenue. This means more strain on their services and more investment needed in data infrastructure in the places they are moving into, like Pakistan and Iraq, for less return. When we take a look at the actual metrics behind those figures, money spent on investment and profits, we see this trend materializing. Investments are up, income is down and rising very, very slowly. Snapchat missing out on the most profitable markets is what gives me pause, as I don't believe that it is a prudent user acquisition strategy to go after volume like Snapchat does. Perhaps, Snapchat is banking on the fact that they run a fairly low overhead operation, especially compared to its competitors, to churn volume into profits. I don't believe they will be able to do it before the cash runs out. This is mostly due to the fact that I don't believe it has a good product. My primary issue with SNAP and its main product, Snapchat, is that the product itself isn't very good. From using it myself for the past ten years (and yet I've never given them money, so they've only profited off of my data), my opinion is that Snapchat isn't the best messaging or social media app. It's a little of both, which makes it a master of none. Other people seem to feel this same way, as there are clear titans in both categories that dwarf Snapchat's userbase. Young people have been Snapchat's base since its launch, and are still its bread and butter user. The issue is that young people are increasingly moving away from Snapchat, as TikTok, Instagram, and (to my surprise) Facebook grow rapidly among Gen Z users in the US. Beginning to fall out of favor with your target audience is a bad sign. One of the big moments in Snap's recent history was the launch of its personal AI chatbot. It was a massive flub, mostly because the public is becoming distrustful of AI chatbots. One big issue is that the bot would openly lie to you about how much data it was tracking. This went viral, even in India (remember this is where Snapchat's largest userbase is), which was very bad PR for Snapchat at the time, and remains controversial as the AI bot stays at the top of your chat log to this day. Snapchat's growth among worldwide users has been positive, but is still far lower than other platforms. From 2023 to 2024, Snapchat grew its global userbase by 6.8%, but this pales in comparison to Instagram's 25% and Pinterest's 23%. Both of those companies also grew their US users, unlike Snapchat, which has stagnated in North American users for the last two years. Snapchat has been beaten down, but its valuation is still rather rich since it has a net negative income. This means that it has even further to fall from here, especially in comparison to its more successful social media peers like META and GOOGL. The major risk and counter-point to my thesis that I think I should mention is the growing popularity of Snapchat's paid service, Snapchat+. This is an independent revenue generator outside of advertisements that is a flat fee to users, which means that if it catches on and continues its trajectory, could bridge some of the missing monetization gap. Snap Inc. has been able to grow its paying users consistently over the last few quarters, and may continue to do so beyond current estimates. Another risk to the sell thesis is that Snap Inc. does have the money to burn. They may be able to stay operational for a very long time with the money they have on hand, potentially long enough to realize greater monetization in developing economies, or ride a trend in the US to increased popularity in the future. The treasury is bleeding out, but slowly, and Snapchat has been able to finance itself out of holes before, and is still issuing convertible notes. This financing, and other deals like it, may be able to keep Snap Inc. going for some time. Snap Inc., the operator of the Snapchat app, is an unimpressive operation to me that, in my opinion, has proven itself unable to acquire users in the most profitable markets, profit off its existing users, and is burning cash at a rate that is faster than makes me comfortable. The product itself has issues and may be falling out of favor with its target audience, giving me further pause. I recommend that investors stay away from Snap Inc. and do not consider it for a place in an equity portfolio. Aggressive investors who want to take a venture capital approach to this (throw spaghetti at the wall and see what sticks) are recommended to invest in Snap's debt rather than its equity.

Snap: Slowing Growth, Persistent Operating Losses, And Excessive Share-Based Compensation

My updated valuation framework lowers Snap's fair implied share price to $6.34. Despite recent signs of stabilization in the advertising and social media landscape, Snap Inc. (NYSE:SNAP) continues to struggle to capture robust revenue growth and generate an operating profit - as highlighted by a weak Q2 2024 reporting. Moreover, a cautious forward guidance poses a headwind to investor enthusiasm, with projected revenue for Q3 projected to grow only 14% YoY at the midpoint, a marked deceleration from previous periods. Overall, I continue to view Snap as a "Sell", and I now estimate a fair implied value of $6.3 per share, vs. $8.3 previously. For context, Snap shares have grossly underperformed the broader market since the beginning of the year: YTD, Snap stock has lost about 48%, while the S&P 500 (SP500) has gained around 16%. Snap reported Q2 2024 revenue on August 1st and was disappointed against consensus expectations. During the period spanning from April through the end of June, Snap generated $1.24 billion in revenues, representing a YoY growth of only 16%. Meta, considerably larger, grew 22% YoY. Notably, Snap's growth rate decelerated by 5 percentage points compared to the previous quarter, raising concerns about the sustainability of Snap's revenue momentum. The slowdown was particularly pronounced in the Brand Advertising segment, which saw a 1% YoY decline, a sharp deceleration of 13 percentage points vs Q1. While adjusted EBITDA was reported at $55 million, up 243% vs. the negative $38 million for the same period one year prior, Snap continues to burn cash: In Q2, operating loss was $254 million, while operating cash flow and free cash flow came in at negative $21 million and negative 73 million, respectively. Shifting perspective to user insights, Snap's daily active users continue to show robust growth, reaching 432 million in Q2, slightly above expectations. However, the growth rate has moderated, with net adds slowing to 9 million compared to 10 million in the previous quarter. And most notably, I highlight that YoY growth in the highest value segment (for advertisers), North America, was non-existent (flat YoY). Looking ahead, Snap's management has provided Q3 revenue guidance of $1.335 billion to $1.375 billion, implying a 14% YoY growth at the midpoint. However, this projection includes a significant margin of uncertainty due to ongoing market volatility and competitive pressures. The company also guided Q3 EBITDA in the range of $70 million to $100 million, which is notably below the consensus estimate of $107 million, reflecting anticipated increases in operating expenses due to incremental investments in AI and machine learning infrastructure. Taking a long-term perspective, Snap's financials show a concerning trend with consistently negative operating income over the years, indicating that the company is consistently spending more on operating expenses than it generates in gross profit. Indeed, high SG&A and R&D have resulted in substantial operating losses, reaching $1.1 billion for the trailing twelve months. In my view, the company's apparent inability to control costs or achieve operating profitability poses significant challenges to its financial stability. One of the key concerns for Snap continues to be the company's high level of share-based compensation: Indeed, in recent quarters, Snap's SBC has accounted for approximately 20-25% of the company's total revenue. In Q2 2024, Snap reported SBC expenses of $275 million, following SBC expenses of $1.25 billion in FY 2023. While management has not provided a specific forecast for the full year of 2024, the trend suggests it could remain close to or above the $1 billion mark again (~7% of the market cap). Following a year of disappointing financial performance, I am updating my valuation framework for Snap to reflect worse-than-expected earnings momentum: Specifically, I am updating my EPS forecasts for 2024, 2025, and 2026 to $0.22, $0.37, and $0.6, respectively. And while my cost of equity assumption is at 10%, I lower my terminal growth rate beyond 2026 to 2%, indicating limited structural growth to account for competitive pressures and social media penetration headwinds. Based on these assumptions, I now estimate a fair implied share price for Snap at $6.34. For context, the "Speculation" value represents the gap between the current market price and the fair implied value. A positive value suggests the market is pricing in a potential upside beyond my estimates. In my view, Snap's Q2 2024 results reveal a company struggling to maintain its growth momentum amid an improving market environment for advertising - a contradictory trend that speaks negatively to Snap's commercial strength. The slowing revenue growth, persistent financial losses, and excessive share-based compensation all suggest that Snap stock may face significant pressure in the foreseeable future. Thus, until Snap demonstrates a clear path to sustainable profitability and better cost control, I remain skeptical and maintain a "Sell" rating with a $6.3 per share target price. In the social media space, Meta Platforms (META) is my preferred pick: Compared to Meta, in my view, Snap's narrower focus, limited scale, and less developed monetization strategies position it at a disadvantage compared to Meta's expansive, multi-platform approach and advanced capabilities in capitalizing on user data and technology trends. Moreover, Meta has a much stronger capital base and cash generation profile, supporting investments in AI infrastructure.