Snap: Better Engagement, But Still Poor Hard Numbers (NYSE:SNAP)

A year ago, I concluded that shares of Snap Inc. (SNAP) were snapping again, as the release of the third quarter results and outlook for the final quarter of the year triggered a renewed reset of the valuation.

Despite reasonable sales multiples, it was substantial losses which meant that fundamental support was hard to find, making it easy to not get involved with Snap stock just yet. This was certainly the case, as Snap was one of the poster child stocks in terms of adjusted earnings metrics in recent years, with huge stock-based compensation expenses not properly accounted for, a practice being ignored by the Street for a too long period of time.

So far in 2023, Snap has seen positive user (engagement) numbers, although this has not resulted in improved financial numbers, in fact the contrary.

Some Perspective

Following the outbreak of the pandemic, and consumers spending a record amount of time online, Snap posted a spectacular 64% increase in 2021 sales to $4.1 billion, but the results on the bottom line told a completely different story. Adjusted earnings were reported at $775 million, but at the same time GAAP operating losses of $705 million were reported, with the vast majority of the difference due to stock-based compensation expenses, equal to roughly 30% of sales!

The market recognized this as well, as an $80 stock during the pandemic fell to the $7 mark in October 2022, as the business saw some real headwinds. First quarter sales for 2022 rose by 38% to $1.06 billion, but second quarter revenue growth slowed down to 13%, with revenues reported at $1.11 billion.

Third quarter sales rose just by 6% to $1.13 billion amidst a 19% increase in the daily active user base to 363 million users, which on the hand indicates user traction, but on the other hand suggests weak advertising markets or deliberate lower ARPU. Adjusted EBITDA was reported at $73 million for that third quarter, as GAAP operating losses rose to $435 million (including a $155 million restructuring charge).

The company was granted a $13.7 billion equity valuation based on 1.71 billion shares trading at $8 per share. Trading at 3 times sales that multiple looked reasonable, but the issue was that realistic earnings still trended around a billion on a $4 billion revenue base, a huge loss by all means. Concerns were certainly high as no formal guidance was given for the fourth quarter, as momentum was going in the wrong direction.

With high quality names, and moreover profitable businesses, seeing big sell-offs at the same time as well, I was not willing to buy the dip in Snap, but bought another basket of technology names.

Trading Flat

Over the past year, shares of Snap have traded in a $7-$14 trading range, now trading towards the lower end of the range at $8 and change, virtually at the same levels as last year.

In January, it appeared that fourth quarter revenues came in dead flat at $1.30 billion as GAAP operating losses were reported at $288 million, all while adjusted EBITDA came in at $233 million. For the year, revenues rose 12% to $4.6 billion, although that adjusted EBITDA fell by nearly 40% to $378 million, as GAAP operating losses near $1.4 billion were reported.

In April, Snap posted daily active user numbers of 383 million, up another 8 million users on a sequential basis and up 15% on the year before. Despite an increase in engagement, revenues were down 7% to $989 million as adjusted EBITDA came in flat, resulting in a dismal operating loss of $365 million.

In July, Snap posted another solid 397 million daily active user number as revenue trends improved slightly, with sales now down 4% to $1.07 billion. The same can not be said for profitability metrics, with EBITDA losses totaling $38 million as operating losses were reported at $404 million.

No imminent recovery is seen, with third quarter sales seen between $1.07 and $1.13 billion, with revenues seen between flat at best and down 5%. Moreover, adjusted EBITDA is seen anywhere between minus $50 and $100 million.

In terms of the valuation, the picture remained similar as the company held about $3.7 billion in cash and equivalents, offset by a similar amount of (convertible) debt, for a flattish net debt load. A 1.7 billion share count works down to a roughly $14 billion valuation, but this is based on flattish to actually falling revenues, as losses are only set to increase this year.

And Now?

The reality is that 2023 is an utterly disappointing year for Snap Inc. While user engagement is comforting, the issue is that sales are trending flattish with losses being substantial, and in fact only on the increase. This might revert a bit in the coming quarters, as Snap is reportedly set to close its augmented reality unit.

These are small wins for shareholders, as well as the fact that some 5 million users are paying $3.99 per month for Snap+ subscriptions, but these are tiny incremental gains. There are some question marks, of course, as the underlying momentum in terms of usage is entirely (and some more) offset by lower revenues per user, which raises some question marks, but could be a positive as well, opening the way for operating leverage down the road.

Needless to say, there are more questions than answers here, so I absolutely see no reason to get involved with Snap Inc. here.