Snap Earnings: Snaps Back From The Dead (NYSE:SNAP)

Investment Thesis

Investors had long ago called Snap (NYSE:SNAP) as a dead company walking. And yet, its Q1 2024 results put substantial doubt into the bear thesis.

And yet, this doubt cuts both ways. On the one hand, this company still has some growth left in the tank. But on the other hand, is this enough to get investors back in? Or is it just a temporary flashback, before Snap tumbles back down once more?

It’s too tough to call. I’m sticking to neutral.

Rapid Recap

Back in January, I wrote, Snap: Massive Turnaround, where I said:

Snap is amidst a substantial turnaround effort.

But even as I extrapolate some heroic profitability improvements over the next twelve months, I find that paying +60x forward EBITDA for Snap prices me out of this stock.

Since I penned those words, the stock fell from $16 per share, down to $11 per share, and is now back to $14 per share. What a rollercoaster of a stock.

And yet, despite the stock moving up so aggressively premarket, I question whether there’s enough value to be found in this name.

Snap’s Near-Term Prospects

I’ll highlight some positive aspects of its narrative, before sprinkling in some helpful additional context.

In the near term, Snap’s focus on diversifying its revenue stream has demonstrated significant progress in its advertising platform, particularly in driving demand from small and medium-sized businesses. This momentum, coupled with the platform’s large and engaged community, which has surpassed 422 million daily active users globally, underscores Snap’s ability to attract and retain users.

Moreover, Snap’s use of augmented reality continues to resonate, with more than 300 million daily engagements with AR experiences on its platform.

While Snap has made significant strides in AI technology, the vast scale of investment by its primary competitor, Meta (META), leaves Snap in the far distance. More specifically, Meta has projected $40 billion as capex this year alone, allowing Meta to allocate substantial resources towards AI research and development. This robust investment reinforces Meta’s competitive advantage in AI capabilities, dramatically strengthening its moat against the likes of Snap.

Revenue Growth Rates Snap Back

Snap delivers investors with a shocker! Its guidance implies that there may be around 19% y/y revenue growth rates for Q2. That is a slight deceleration from Q1 2024, but given that most investors had already given up and capitulated on Snap, this set of results is nothing short of surprising.

Bulls will undoubtedly be so eager to “buy the dip” on this fallen angel and start to make all kinds of extrapolations about its growth rates.

However, before investors do that, I suggest that investors consider the reality of the situation. H1 of the prior year delivered substantially negative y/y revenue growth rates. Consequently, this year’s H1 was bound to deliver rather solid growth rates.

However, now the big question is this: going forward, what sort of growth rates can we expect from Snap? Can the case be made that around the mid-teens growth rates is what’s expected from Snap over the coming year, particularly as its comparables become more challenging?

And if indeed Snap were to grow in the mid-teens, what sort of multiple will investors be willing to pay for this sort of inconsistent and unpredictable business?

SNAP Stock Valuation — 100x EBITDA

Here’s where things become more complicated for the bull case.

Snap’s Q1 of last year held approximately $250 million of net cash on its balance sheet. Now, twelve months later, Snap’s balance sheet holds a net debt position of approximately $400mm. Why does this matter when the share price is up 25% premarket?

Because Snap’s ability to raise more capital for future investments and share repurchase is contingent on its balance sheet. Given that this business is to a large extent still in the penalty box, together with the fact that its balance sheet is now holding a net debt position, this complicates its ability to raise more capital.

But why does it matter how much cash, Snap holds on its balance sheet?

Here’s the issue. The graphic above hasn’t been updated for its latest Q1 2024 results.

Nonetheless, you can see that despite Snap repurchasing its shares in the past several quarters to manage its dilution, its share count continues to increase. Likewise, its latest quarterly results point to its share count increasing 4% y/y, despite Snap repurchasing $250 million worth of its stock. Thus, with a net debt position on its balance sheet, this will prevent further capital from being used to aggressively repurchase its shares, leading to its share count to uptick at a faster pace.

On top of that, Snap guides for approximately $50 million of EBITDA for Q2 2024. Even if we presume that this puts Snap on a run-rate towards $220 million of EBITDA going forward, this still leaves Snap priced at 100x forward EBITDA. This is simply too expensive for a business that is so erratic and unpredictable.

The Bottom Line

Snap’s prospects have been a real rollercoaster ride lately, but as the dust settles, the question remains: will it snap back or snap out of existence? The recent uptick in revenue growth rates might seem like a bright spot, but with a balance sheet now in a net debt position and a share count that just won’t stop increasing, its outlook is fuzzy.

At 100x forward EBITDA, it seems like Snap’s valuation is too uncertain. So, while some may be eager to “buy the dip,” others might be wise to just… snap out of it.