Snap Stock: Bear vs. Bull

Instantaneousit is (INSTANTANEOUS -6.93%) the stock recently fell below its IPO price of $17 after unexpectedly slashing its second-quarter guidance on May 24.

In its April 21 first-quarter earnings report, Snap predicted revenue would rise 20% to 25% year-over-year in the second quarter and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) would decrease from 57% to 100%.

That outlook was already bleak, but Snap now expects its revenue and adjusted EBITDA to miss the low end of that guidance. Snap blamed the downward revision on “the macroeconomic environment”, which “has deteriorated further and faster than expected”.

Image source: Getty Images.

The dire warning signals that Snap’s investors still have a lot to do, even as the company insists it still has “significant opportunities” to grow its “average revenue per user over the long term.” Let’s review the bearish and bullish cases for Snap to see if it can achieve these goals.

What bears will tell you on Snap

Bears will tell you that Snap has a history of over-promising and under-delivering. During his presentation at Investor Day last February, Snap’s chief product officer, Peter Sellis, told investors the company could still grow annual revenue by around 50% for “several years.” .

That bold pledge drove Snap shares to an all-time high of $83.11 last September. However, Snap underestimated the impact of Appleit is (AAPL 0.06%) privacy changes on iOS, which began to slow its growth in the second half of 2021, as well as weed-like growth ByteDanceit’s TikTok. TikTok has notably overtaken Snapchat as the favorite social network of American teenagers in Piper Sandler‘s latest biannual survey, which abruptly ended Snapchat’s long reign as teen leader.

Adding to these challenges, Russia’s invasion of Ukraine blinded Snap’s European business in the first quarter. Rising interest rates, which aim to strangle economic growth to keep inflation in check, will also likely dampen market appetite for digital ads.

Snap didn’t abandon its goal of driving 50% sales growth over the long term, but the deceleration in growth in daily active users (DAU), average revenue per user (ARPU) and revenue from past year indicate that the dream is probably dead. :

Growth (YOY)

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

EAD

22%

23%

23%

20%

18%

ARPU

36%

76%

28%

18%

17%

Revenue

66%

116%

57%

42%

38%

Data source: Snap. YOY = year after year.

Snap also cannot generate stable earnings based on generally accepted accounting principles (GAAP). Its net loss fell from $945 million in 2020 to $488 million in 2021, but widened year-over-year from $287 million to $360 million in the first quarter of 2022. Snap’s high stock-based compensation spend, which consumed 27% of its revenue in 2021 and 26% of its revenue in the first quarter of 2022, will keep its bottom line immersed in red ink for the future. predictable.

As Snap’s growth decelerated and its stock plummeted, its insiders headed for the exits. Over the past 12 months, they’ve sold 12 times as many stocks as they’ve bought.

But even after all those sales, the stock still can’t be considered a bargain at four times this year’s sales. Metaplatforms (FB 0.72%)which is bigger and more profitable than Snap, is also trading at four times this year’s sales and just 16 times forward earnings.

What Bulls Will Tell You On Snap

Bulls will point out that Snap did not cut its DAU 343 million to 345 million forecast in the second quarter, which would still represent growth of 17% to 18% from a year ago. Consequently, Snapchat continues to grow at a healthy pace, but its ads face cyclical headwinds. Once these headwinds dissipate, its revenue and adjusted EBITDA growth could stabilize again.

Underlying demand for Snap’s ads is still high. In its first quarter report, the company revealed that initial engagements from its agency and advertising partners had already increased by more than 60% year-over-year. It also plans to ride out Apple’s changes with more proprietary data tracking services and continue to expand beyond its traditional ads with more augmented reality (AR) features, games and short videos. .

Snap also still has plenty of cash to implement these changes as it weathers the coming storm. It ended the first quarter of 2022 with about $5 billion in cash, cash equivalents and marketable securities, and its operating and free cash flow both turned positive for the first time last year.

Finally, Snap’s depressed valuations could make it a tempting buyout target for Meta, which repeatedly tried to buy the company before its IPO, or another big tech company.

Bears have the upper hand (for now)

Snap isn’t doomed, but there are clearly more reasons to sell the stock than to own it right now. Investors should stick with more resilient tech stocks until Snap finally stabilizes its business.

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