Snap (NYSE:SNAP) Misses Q4 Sales Targets, Stock Drops 14.5%

Full Report / January 31, 2023
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Social network Snapchat (NYSE: SNAP) fell short of analyst expectations in Q4 FY2022 quarter, with revenue flat year on year at $1.29 billion. Snap made a GAAP loss of $288.4 million, down on its profit of $22.5 million, in the same quarter last year.

Snap (SNAP) Q4 FY2022 Highlights:

  • Revenue: $1.29 billion vs analyst estimates of $1.3 billion (0.61% miss)
  • EPS (non-GAAP): $0.14 vs analyst estimates of $0.12 (15.9% beat)
  • Free cash flow of $78.3 million, up from $18.1 million in previous quarter
  • Gross Margin (GAAP): 62.9%, down from 65.3% same quarter last year
  • Daily Active Users: 375 million, up 56 million year on year

Founded by Stanford University students Evan Spiegel, Reggie Brown, and Bobby Murphy, and originally called Picaboo, Snapchat (NYSE: SNAP) is an image centric social media network.

Snapchat differentiates itself from other social networks through product innovation around Augmented Reality (AR), demographics, and the ephemeral nature of its messaging and Stories. Snapchat is a mobile first, camera centric image messaging app whose disappearing messages are meant to emphasize personal expression and living in the moment. The Snapchat platform has 5 distinct features: the main Camera tab, where users send snaps to friends, Communication (messaging/video calls), Snap Map (personalized map that shows friends and local businesses), Stories (content from users, news, and professionally generated content), and Spotlight (sort of a TikTok-like never ending spool of content Snapchat tailors to a user’s likes).

More so than other social networks, Snapchat is geared to digital natives, specifically 13-34 year olds. This is what makes the platform appealing to advertisers - its unique ability to address a hard to reach demographic at scale. The majority of under 35s in the US, Australia, and Western Europe use Snapchat. Originally built only for iOS, Snapchat introduced a version for Android in 2019, which is why rest of world adoption is still in its early stages. The reason advertisers have flocked to Snapchat is the very high ROI for advertisers: the cost of advertising on Snap remains low.

Businesses must meet their customers where they are, which over the past decade has come to mean on social networks. In 2020, users spent over 2.5 hours a day on social networks, a figure that has increased every year since measurement began. As a result, businesses continue to shift their advertising and marketing dollars online.

Snapchat (NYSE: SNAP) competes with fellow social media advertising platforms like Google (NASDAQ: GOOGL), Meta Platforms (NASDAQ:FB), Twitter (NYSE: TWTR), and Pinterest (NASDAQ: PINS)

Sales Growth

Snap's revenue growth over the last three years has been impressive, averaging 42.9% annually. The initial impact of the pandemic was positive for Snap's revenue, but growth rates subsequently normalized.

Snap Total Revenue

This quarter, Snap reported a rather lacklustre 0.14% year on year revenue growth, falling short of Wall St expectations. Snap has not provided guidance for the next quarter.

Usage Growth

As a social network, Snap can generate revenue growth by increasing user numbers, and by charging more for the ads each user is exposed to.

Over the last two years the number of Snap's daily active users, a key usage metric for the company, grew 20.2% annually to 375 million users. This is a strong growth for a consumer internet company.

Snap Daily Active Users

In Q4 the company added 56 million daily active users, translating to a 17.5% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Snap it measures how much it makes off ads served to each user, proxy for how valuable advertisers find its audience and its ad-targeting capabilities.Snap ARPU

Snap’s ARPU growth has been decent over the last two years, averaging 18%. The ability to increase price while still growing its user base shows the value of Snap’s platform. This quarter, ARPU shrank 14.8% year on year, settling in at $3.47 for each of the daily active users.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Snap grow by a combination of product virality, paid advertisement or incentives.

Snap is efficient at acquiring new users, spending 39.1% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency is indicative of a relatively solid competitive positioning, which gives Snap the freedom to invest its resources into new growth initiatives.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Snap reported EBITDA of $233.2 million this quarter, which was a 17.9% margin. Over the last twelve months Snap has shown a solid, above-average profitability for a consumer internet business with average EBITDA margins of 7.77%.

Snap Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Snap's free cash flow came in at $78.3 million in Q4, down 51.3% year on year.

Snap Free Cash Flow

Snap has generated $55.3 million in free cash flow over the last twelve months, a 1.2% of revenues. This FCF margin is a result of Snap asset lite business model, and provides it with the optionality to further invest in the business.

Key Takeaways from Snap's Q4 Results

Sporting a market capitalization of $17.8 billion, more than $3.93 billion in cash and with positive free cash flow over the last twelve months, we're confident that Snap has the resources it needs to pursue a high growth business strategy.

It was great to see that Snap’s user base is growing. That feature of these results really stood out as a positive. On the other hand, it was less good to see that the revenue was flat and that the company has not provided any guidance. Overall, this quarter's results were not the best we've seen from Snap. The company is down 14.5% on the results and currently trades at $9.87 per share.

Is Now The Time?

Snap may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Snap is not a bad business. Its revenue growth has been exceptional. And on top of that, its user growth has been strong.

At the moment Snap trades at next twelve months EV/EBITDA 28.1x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Snap doesn't trade at a completely unreasonable price point.

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