Snap (NYSE:SNAP) Misses Q4 Sales Targets and Guides Adj. EBITDA Well Below, Stock Drops 29.5%

Full Report / February 06, 2024

Social network Snapchat (NYSE: SNAP) missed analysts' expectations in Q4 FY2023, with revenue up 4.7% year on year to $1.36 billion. The company also expects next quarter's revenue to be around $1.12 billion, slightly below analysts' estimates. It made a non-GAAP profit of $0.08 per share, down from its profit of $0.14 per share in the same quarter last year.

Snap (SNAP) Q4 FY2023 Highlights:

  • Revenue: $1.36 billion vs analyst estimates of $1.38 billion (1.5% miss)
  • EPS (non-GAAP): $0.08 vs analyst estimates of $0.06 (25.7% beat)
  • Revenue Guidance for Q1 2024 is $1.12 billion at the midpoint, below analyst estimates of $1.12 billion
  • Adjusted EBITDA Guidance for Q1 2024 is ($75) million at the midpoint, well below analyst estimates of ($28) million
  • Free Cash Flow of $110.9 million is up from -$60.65 million in the previous quarter
  • Gross Margin (GAAP): 54.3%, down from 63.4% in the same quarter last year
  • Daily Active Users: 414 million, up 39 million year on year (beat vs. expectations of 412 million)
  • Market Capitalization: $27.58 billion

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.

Social Networking

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 strong, averaging 28.2% annually. This quarter, Snap reported rather lacklustre 4.7% year-on-year revenue growth, missing analysts' expectations.

Snap Total Revenue

Guidance for the next quarter indicates Snap is expecting revenue to grow 12.8% year on year to $1.12 billion, improving on the 7% year-on-year decline it recorded in the same quarter last year.

Usage Growth

As a social network, Snap generates revenue growth by increasing its user base and charging advertisers more for the ads each user is shown.

Over the last two years, Snap's daily active users, a key performance metric for the company, grew 15.7% annually to 414 million. This is solid growth for a consumer internet company.

Snap Daily Active Users

In Q4, Snap added 39 million daily active users, translating into 10.4% year-on-year growth.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Snap because it measures how much the company earns from the ads shown to its users. ARPU can also be a proxy for how valuable advertisers find Snap's audience and its ad-targeting capabilities. Snap ARPU

Snap's ARPU has declined over the last two years, averaging 7.5%. Although the company's users have continued to grow, it's lost its pricing power and will have to make improvements soon. This quarter, ARPU declined 5.1% year on year to $3.29 per user.

Pricing Power

A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Snap's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 54.3% this quarter, down 9.1 percentage points year on year.

For social network businesses like Snap, these aforementioned costs typically include customer service, data center, and other infrastructure expenses. After paying for these expenses, Snap had $0.54 for every $1 in revenue to invest in marketing, talent, and the development of new products and services. Snap Gross Margin (GAAP)

Snap's gross margins have been trending down over the past year, averaging 54.1%. This weakness isn't great as Snap's margins are already slightly below other consumer internet companies and falling margins point to potentially deteriorating pricing power.

User Acquisition Efficiency

Unlike enterprise software that's typically sold by dedicated sales teams, consumer internet businesses like Snap grow from a combination of product virality, paid advertisement, and incentives.

Snap is efficient at acquiring new users, spending 44.8% of its gross profit on sales and marketing expenses over the last year. This level of efficiency indicates relatively solid competitive positioning, giving Snap the freedom to invest its resources into new growth initiatives.

Profitability & Free Cash Flow

Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.

This quarter, Snap's EBITDA came in at $159.1 million, resulting in a 11.7% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 2.9%.

Snap Adjusted EBITDA Margin

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Snap's free cash flow came in at $110.9 million in Q4, up 41.5% year on year.

Snap Free Cash Flow

Snap has generated $34.79 million in free cash flow over the last 12 months, or 0.6% of revenue. This FCF margin stems from its asset-lite business model and enables it to reinvest in its business without depending on the capital markets.

Key Takeaways from Snap's Q4 Results

It was good to see Snap add new users this quarter and beat DAU expectations. On the other hand, its revenue unfortunately missed analysts' expectations and its revenue growth was quite weak. While next quarter's revenue guidance was in line, adjusted EBITDA guidance was well below. This shows that Snap's growth is coming at higher costs or less efficiency than expected. Overall, this was a mediocre quarter for Snap. The company is down 31.4% on the results and currently trades at $11.98 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 Snap isn't a bad business, it probably wouldn't be one of our picks. Although its revenue growth has been good over the last three years and its growth over the next 12 months is expected to accelerate, its ARPU has declined over the last two years.

Snap's price/gross profit ratio based on the next 12 months is 10.0x. 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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