Snap: Market Extrapolating Weakness Too Far (NYSE:SNAP)

Wachiwit Despite another tough earnings report, Snap (NYSE:SNAP) is right back to prior lows were the stock was exceptionally beaten down. The social messaging company continues to deliver solid user growth that should ultimately lead to the higher monetization to reward patient stakeholders. My investment thesis is ultra Bullish on the stock at the previous lows. Source: Finviz Focus On Users Snap reported strong user growth in the quarter with daily active users (DAUs) up 17% YoY to 375 million. As with other similar technology plays, the majority of the user growth now comes from outside the key areas of the US and Europe, which hurts near-term monetization. As a prime example, the company saw Rest of World DAUs surge 31% to reach 183 million. Source: Snap Q4’22 presentation The social media company saw no benefits from the North America region where total users were up only 3%, or 3 million DAUs. This total region includes areas such as Mexico and Central America that don’t monetize anywhere close to the levels of the US and Canada. Snap reported Q4’22 revenue virtually flat YoY at $1.3 billion. The company reported ROW revenues grew 28% to $201 million while North America was weak. In essence, revenues grew in areas of the world were ARPU is only $1.10 versus North America up to $8.77 per user. When the digital ad market improves and spending returns to growth, Snap will have this huge headwind with strong user growth. While the Q4’22 numbers weren’t overly exciting, the real disappointment was in the guidance for Q1’23. Snap forecast a revenue decline of 2% to 10% in the quarter due to a 7% dip already seen in the January numbers. The company forecast amounts to total revenues in the $1.0 billion range. The company faces several self-inflicted issues with advertising revenues in Q1’23 as follows: New ad platform for DR will lead to near-term disruptions in auction dynamics as partners confirm new ad measurements before committing higher ad spend. The sales reorg channel redesign impacts sales rep efficiency in the short term. Big changes to the app UI shipped at the start of Q1. Snap reported Q2’21 revenues of $982 million when global DAUs were only 293 million. The social messaging company has added an amazing 82 million DAUs during the 18 month period, yet revenues aren’t guided towards growth in a sign of the difficult time the ad market and self inflicted hits from internal changes all at the same time once the busy holiday season was over. The social messaging company did guide to solid DAUs of between 382 and 384 million in Q1 2023. Snap is guiding towards strong 15% user growth. The market appears to be extrapolating too much on the current pause in ad spending after several massive years of revenue growth. The company grew revenues from only $1.2 billion in 2018 to $4.1 billion in 2021. Snap actually saw a revenue acceleration during covid and the current digestion period shouldn’t be over extrapolated as any business weakness. Source: Snap Q4’22 presentation The social messaging company has now grown Snapchat+ paying subscribers to over 2 million providing another avenue to higher monetization over time. In addition, Snap continues to offer a prime way to play growing demand for AR with over 300,000 AR creators and developers working with AR Lenses. The company has plenty of catalysts for growth when the market normalizes in 2023. Discounted Now The big issue with Snap following the hot IPO was the company burning millions and billions in cash on an annual basis. With the $500 million cost cutting measures implemented in Q4, the management team is now highly focused on being adjusted EBITDA profitable and cash flow positive including $55 million in free cash in 2022. The business is far more appealing now with strong user growth and positive cash flows, yet the stock trades near the all-time lows. Investors have far less interest in Snap when the financials are the best and the Q1’23 DAU guidance is for the largest user base in history. This market disconnect has the stock trading at only 2.7x forwards sales while Pinterest (PINS) trades a 50% premium at 4.6x sales. Even the struggling Meta Platforms (META) trades at a higher forward P/S multiple of 2.9x. Data by YCharts Takeaway The key investor takeaway is that Snap is definitely struggling to return the business to growth, but the company still has plenty of catalysts for when the ad market improves. Investors should use the weakness to buy the stock on the cheap when the market is extrapolating too much on current weakness.

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