According to the stock portal beststocks.com Snap Inc. (NGS: SNAP) jumped 30% on 10/21/20 after posting 3Q20 revenue that far exceeded consensus expectations. The company also posted its highest quarterly growth in daily active users since 2017, adding over 11 million monetizable DAUs.
Advertisers are increasingly turning to the Snapchat platform as much for what it is not as for what it is, in our view. Snapchat is not in the crosshairs of a hostile Congress, which has become a daily reality for Facebook. Unlike Twitter, the Snapchat platform is not under unrelenting scrutiny over the presence of toxic content, malicious actors, and bot-based fake users. And Snap is not seeking to engineer a change in ownership to avoid being banned in the U.S. – the challenge facing close rival TikTok.
As the company grows in heft and influence, similar challenges may emerge for Snap. For now, however, Snap is becoming an investor favorite in the social media space based on the relative innocence of its content and the frivolous nature of its lenses and applications
At the same time, Snap has moved beyond its playful base of tweens and teens to deliver news flow and live sports content. Snapchat users stepped up viewership of original short-form shows by more than 50% in 3Q20, and 50 million-plus Snapchatters are watching content supplied by TV partners on the platform.
For 4Q20, Snap’s dynamic guidance suggests additional strong sequential growth in DAUs and revenue. The pandemic appears as relentless as ever.
We upgraded SNAP shares at $10.81 on 3/12/20 as the still unfamiliar pandemic began to lash the coastal states. As citizens first on the East and West Coasts and then across the country were driven into their homes for extended periods, many used social media to substitute for physical contact. Our since-validated thesis is that Snap and other social media stocks would outperform the market and the peer group in the ensuing months.
COVID-19 has introduced changes in our world, including accelerating the digital economy, that we believe will endure long after the pandemic recedes. We believe these factors favor SNAP for long-term investors as well.
RECENT DEVELOPMENTS
For 3Q20, Snap reported revenue of $677 million, which was up 52% year-over-year and 49% sequentially. Revenue was above the $552 million consensus forecast. The non-GAAP profit was $0.01 per share. The Street had been modeling a non-GAAP loss of $0.05 per share.
We expect many users driven to social media platforms during the lockdown to maintain a presence on sites such as Snapchat and make them part of their everyday experience even in the post-pandemic world.
Advertisers are increasingly turning to the Snapchat platform as much for what it is not as for what it is, in our view. Snapchat is not in the crosshairs of a hostile Congress, which has become a daily reality for Facebook. Unlike Twitter, the Snapchat platform is not under unrelenting scrutiny over the presence of toxic content, malicious actors, and bot-based fake users. And Snap is not seeking to engineer a change in ownership to avoid being banned in the U.S. – the challenge facing close rival TikTok.
U.S. DAUs (36% of total) rose 7% year-over-year and were flat sequentially. European users (29% of total) were up 11% year-over-year and 1% sequentially. U.S. DAUS were roughly flat, while Europe added one million new DAUS on a sequential basis.
DAUs rose by 10 million from the prior quarter and by 26 million from the prior year.
Consumers outside of North America and Europe are less likely to own pricey Apple iPhones running on iOS, and more likely to rely on devices powered by the Android operating system. Snap’s redesigned Android app was broadly deployed in 2019 and continues to gain momentum in 2024.
ARPU, or average revenue per DAU, was $2.73 in 3Q20, up 28% from $2.12 a year earlier and also up from $1.91 in 2Q20. ARPU exceeded the prior peak advertising quarter of 4Q19, whenit reached $2.58.
More than 50 million-plus Snapchatters are watching content supplied by TV partners on the platform. Snapchat users also stepped up viewership of original short-form shows by more than 50% in 3Q20. The increased use of high-end content is leading to better monetization for partners, who saw an 85% year-over-year increase in payments in 3Q20.
Snap is not providing formal financial guidance, but did indicate that current trends support a 47%-50% year-over-year increase in 4Q revenue.
EARNINGS & GROWTH ANALYSIS
- First-quarter revenue was above the $552 million consensus forecast.
- The Street had been modeling a 3Q20 non-GAAP loss of $0.05 per share.
- The 2019 non-GAAP loss was $0.17 per share, versus a 2018 non-GAAP loss of $0.47 per share.
Additionally, the company believes it is positioned to close 2024 with approximately 257 million DAUs. That would indicate high-teens annual growth and mid-single-digit sequential growth in DAUs. Based on those metrics, the company is implicitly modeling mid-20% growth in average revenue per user for 4Q20, to more than $3.00.
We now project a 2024 non-GAAP loss of $0.12 per share, compared to a prior loss forecast of $0.16 per share.
FINANCIAL STRENGTH & DIVIDEND
Ranking on Snap Inc. is Medium. During 3Q19, Snap for the first time took on debt in the form of a convertible notes offering. Snap is unprofitable and is currently a user rather than a generator of cash flow. The pace of cash flow burn has slowed, but is ongoing. Snap issued additional convertible debt in 2Q20 in order to bolster overall liquidity and cash on hand.
Prior to the IPO and as of 12/31/16, Snap had $987 million in cash and equivalents, $1.72 billion in total assets, shareholders’ equity of $1.51 billion, and no debt.
Debt was $1.65 billion at the end of 3Q20.
Net cash was $1.22 billion at year-end 2019.
MANAGEMENT & RISKS
In May 2019, Snap appointed Derek Andersen as CFO and chief accounting officer. The company recently added new officers, including Chief Strategy Officer Jared Grusd, Chief Business Officer Jeremi Gorman and Chief Communications Officer Julie Henderson. Lara Sweet (formerly interim CFO) was named as chief people officer.
Risks facing Snap also include new competitive offerings, such as the ‘Stories’ clone offered by Facebook’s Instagram, and the Tik-Tok platform. Other risks include the dependence of users, advertisers and partners on engagement by DAUs; reliance on advertising for substantially all revenue; and a history of losses with the potential of never attaining GAAP profitability.
Snapchat relies on Google Cloud for computing, storage, bandwidth, and other services. Potential disruption of Google Cloud could materially impact the usability of the company’s core product.
In addition, it should be noted that Snapchat does not have a presence in China. There is a risk that Snapchat may never be able to enter the Chinese market.
The capital structure may also present a risk to common shareholders. Class A common shareholders – the only publicly available class of shares, have no voting power. Evan Spiegel and Robert Murphy hold 44.4% of voting control.
VALUATION
Snap Inc. is and has been unprofitable, though it appears on track to attain non-GAAP profitability in 2024.
Based on price/sales multiples for SNAP versus peers, we see value in the $40 range.
On a price/sales-to-sales-growth metric – similar to PEG and used for unprofitable or fractionally profitable companies – SNAP trades at a multiple of 0.32, versus an average of 0.75 for a social media peer group that includes FB, TWLO, TWTR, and PINS.
We upgraded SNAP shares below $11 and they have outperformed the market and peer group since that time.