In-depth Analysis: Is Snap Heading into Spring?

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By Tero Vesalainen

The perennially underperforming social media stock Snap(SNAP.US), which saw a surge in its stock price prior to the release of its latest earnings report on February 6th, dropped over 30% after announcing disappointing results. Snap's revenue came in at $1.36 billion, a 5% year-over-year increase, falling short of the expected $2 billion. The company's Snapchat platform saw a 10% year-over-year increase in daily active users (DAU) to 414 million, driven by growth in users with lower average revenue per user (ARPU) in global markets.

In 2023, the total revenue reached $4.6 billion. At Snap's current stock price of $10.73 (market cap of $17.71 billion), this represents 3.85 times the revenue or 3.89 times the EV/2023 revenue. However, the company reported a net loss of $1.322 billion for the fiscal year 2023, compared to $1.43 billion in 2022.

With the disappointing earnings report, market sentiment turned negative once again. Long-standing concerns resurfaced about the platform losing advertising spend to Meta and Snap's ability to turn a profit. Particularly troubling was the lack of revenue growth in 2023, compared to Meta's 16% growth, indicating the adverse impact of losing Meta platform ad spend.

However, looking at Snap's market-to-revenue ratio of 3.85 times for 2023, assuming revenue for 2024 is $5.106 billion, it could be 3.47 times, while Meta's and Pinterest's ratios reached 9.47 times and 7.95 times, respectively, during the same period. Consequently, Meta and Pinterest have significantly outperformed Snap in the past 12 months, with Meta rising by 172.8% and Pinterest by 43.7%, while Snap has only increased by a negligible 5.6%.

Discerning investors note that social media platform Pinterest (market cap of $24.4 billion) is valued similarly to Snap. Pinterest boasts 498 million monthly active users (MAUs) with a market-to-revenue ratio of 7.95 times, compared to Snap's 3.85 times, despite Snapchat having over 800 million MAUs.

The valuation gap between the two seems considerable. Assuming Pinterest's non-GAAP basis and EBITDA profit margins are high with rapid growth, considering its larger asset value, broader user base, and higher ARPU, Pinterest appears profitable.

As of Q4 2023, Pinterest's global ARPU was $2, with North America's ARPU at $8.07 (+6% year-over-year). During the same period, Snap's global ARPU was $3.29, with North American ARPU at $8.96 (+2% year-over-year).

Furthermore, the smaller-scale (negative free cash flow) social networking bulletin board company Reddit appears to have priced its IPO at least 6 times its 2023 revenue, with a recent data licensing deal with Alphabet cementing its status as a "AI game."

It is believed that the market will eventually realize that Snap's value relative to its peers is significantly underestimated, especially when considering Reddit's IPO pricing valuation.

Moreover, Snap's two growth highlights are its India and Snapchat+ subscription businesses. Snapchat has surpassed 200 million MAUs in India, doubling in a year. In India, platforms like TikTok and Meta dominate communication social media, but TikTok was banned in 2020. Assuming there will be 300 million MAUs in India by 2024 or 2025, generating $300 million in annual revenue at $1 ARPU.

Snap's rapidly growing subscription service Snapchat+ was launched in 2022 and has already amassed over 7 million users. Assuming there will be 10 million users this year, generating $39.99 per year per user, it will bring in $400 million in annual revenue. The expected total revenue will be $700 million. In my view, both India and Snapchat+ businesses can surpass expectations after 2024, eventually reaching $1 billion in revenue. These are solid incremental revenue contributors, coupled with the assumption of reasonable high single to double-digit revenue growth in the North American advertising business this year, are significant revenue growth catalysts for Snap. Snap's expected revenue for 2024 is 3.47 times, without the need for revenue growth like Meta's, indicating a substantial increase in its stock price.

Although Evan Spiegel has consistently expressed a desire to keep Snap independent, I believe the possibility of Snap being acquired cannot be ruled out, and Snap's private market value is much higher than its current level. Regardless of the acquisition potential, Snap provides attractive strategic and scarcity value for many tech giants and large tech peers collaborating with Snap. These tech giants are particularly competitive in areas such as artificial intelligence, video, audio streaming, e-commerce, and payments. This further enhances the attractiveness of Snapchat as a platform and user base for large tech companies to collaborate in these areas.

Therefore, I expect Snap to announce further enhancements to new partnerships this year, bringing short-term stock catalysts that will translate into increased company revenue.


Snap's Current Challenges and the Rebound in 2024

Snapchat's DAUs in North America remained relatively flat, increasing from 101 million in Q3 2023 to 100 million in Q4 2023, on par with the same period a year ago in Q4 2022. While revenue grew year-over-year from $1.3 billion in Q4 2022 to $1.361 billion in Q4 2023, the revenue in North America only saw a 2% year-over-year increase, rising from $880 million in Q4 2022 to $900 million in Q4 2023.

Given the growth in Snapchat+ subscriptions from 2 million in Q4 2022 to 7 million in Q4 2023, actual advertising revenue in North America may have declined year-over-year. Snap's brand-driven advertising business saw a 3% year-over-year decrease, while its direct advertising business grew by 3%. Considering the significant contribution of brand-driven advertising to Snap's advertising revenue, we can see how overall advertising revenue in North America may decline.

Snap currently faces several challenges in advertising revenue, which may be attributed to several factors.

The advertising environment in 2023 rebounded from the slowdown in 2022, with advertisers increasingly favoring mainstream social media advertising platforms like Meta and TikTok. Snapchat's primary user base consists of Generation Z, Alpha, and young millennial users, each with varying levels of daily engagement and usage of different features within the app.

Snapchat's original core function in 2011 was as a disappearing photo messaging app. Snap has demonstrated strong product innovation and was among the first to introduce social media features such as Snapchat Stories (later successfully copied by Instagram) and many other embedded app features. Although there are multiple features/products within the Snapchat app (Stories, Spotlight, VR technology, Maps, etc.), its popular original core features (Lenses and photo filter messaging) are low-engagement products, with users spending less time and therefore challenging for advertising monetization.

This is also a profit dilemma faced by other messaging/chat platforms like WeChat App, as chat messages themselves are not a product conducive to direct response advertising.

Conversely, chat functionality monetization (outside of advertising) can come from in-app purchases and other multi-purpose features (payments, e-commerce, etc.), as seen in popular apps like Line and WeChat in different regions of Asia and China, respectively. Snap's Snapchat+ subscription service is a good start for Snap's paid services and further rollout of non-advertising, paid app add-ons.

Snapchat's powerful filters and AR Lenses serve specific purposes and chat needs but without advertising within Lenses and chat features, except for occasional sponsorships by major brand advertisers. For users primarily utilizing Snapchat's chat and Lens features, Snap ultimately offers a very low advertising service feature, considering the significant investment in product innovation costs. Thus, this partly explains why Snap's ARPU in North America is $8.96, while Facebook's ARPU in North America is $68.44. In a more selective advertising environment, the varying engagement levels of Snap's user base may be a factor in advertisers' preference for advertising on mainstream platforms like Meta. Meta's Facebook and Instagram cover demographics across all age groups, with high engagement and activity levels highly suitable for direct advertising engagement.

Moreover, Snapchat has always been more focused on private messaging among friends, making it more suitable for traditional brand advertising businesses and high-funnel advertising rather than the more apparent platform value of direct advertising and low-funnel advertising. In contrast, benefiting from advanced algorithms and data tools, Meta's platform and TikTok lead in providing highly relevant and targeted direct advertising based on user interests.

Snap mentioned in its investor letter that the conflict in the Middle East affected revenue growth by two percentage points in Q4, which could be due to the cautious brand advertising spend among major advertisers, also highlighting its reliance on brand advertising. While Snap has been striving to improve its direct advertising business, it is still considered significantly behind Meta, except in terms of scale, active machine learning, and AI spending by Meta.

Snap expects revenue in Q1 2024 to be between $1.095 billion and $1.135 billion, translating to a year-over-year growth of 11% to 15%. In the second half of 2024 and 2025, as consumer rebounds and advertising spending generally declines, brand advertising may rebound, while direct advertising spend can see more allocation to a less "critical" Snap advertising platform.

Importantly, Snap's user base and popularity have not been affected by its user growth, but in my view, its current resistance is a result of the app's long-term characteristics and the early-stage results of macroeconomic rebounds. The duopoly dynamics of communication in North America's social media have not changed significantly in recent years; Snap still trails behind Meta's platform and TikTok, yet Snap's overall user base continues to grow. A meaningful revenue growth rebound is expected in 2024. The anticipated 11% revenue growth in 2024 appears very achievable, with brand advertising rebounding, a widespread advertising market rebound increasing direct advertising allocation to Snap, and recent collaborations and subscription services also bringing in revenue.


Snap's Double Tailwind in the Latter Half of 2024

Since the beginning of last year, tech stocks and large-cap stocks with significant revenue and profit growth have seen substantial gains. I believe the current macro environment (robust U.S. economy, looming recession avoidance, recent data showing inflation slowdown, and likely rate cuts later this year) will continue to support the rise of these outstanding large-cap tech stocks.

Meanwhile, tech stocks that saw significant price increases but remained unprofitable themselves continued to experience significant pullbacks from their 2021 highs, under significant pressure in a high-rate/risk premium environment. However, this does not mean that tech companies need to achieve net profits and growth at present for their stock prices to rebound and yield returns, but they do need to achieve some fundamental growth.

For example, Spotify is still not profitable, but its recent quarter saw significant growth in revenue (+16%) and users (+23% MAU), leading to a 115% increase in its stock price over the past year. With a market capitalization of $17.7 billion, Snap has over 800 million MAUs, while Spotify, with a market capitalization of $50 billion, only has 602 million MAUs.

Compared to the oligopoly-dominated communication social media industry, audio streaming is a more competitive field, with tech giants like Apple, Alphabet, and Amazon competing with Spotify. However, their revenue and user growth are higher than tech stocks, so even if they give up profitability in net terms, their stock prices will continue to perform well. Thus, I do believe that Snap could achieve similar revenue growth to Spotify this year (around 15% growth).

I believe that Snap's stock will benefit from declining interest rates, declining inflation, and a stronger consumer environment. First, based on the aforementioned brand advertising industry recovery and increased direct advertising on Snap. Second, as inflation data continues to trend downward, we expect rate cuts in 2H this year, reducing the necessary risk premium and allowing moderately profitable tech company stock prices to continue rising.

We have already seen more speculative and forward-looking rebounds in market sectors with average performance. With its stock price currently hovering below $11, I have a strong tactical bullish view on Snap's short-term price appreciation.


Potential Acquisition Existence, Yet Snap's Strategic Value Provides a Safety Margin

Ranked third in the global communication social media oligopoly, Snap ranks behind Meta's platform and TikTok.

However, as a market dominated by an oligopoly, Snap, with 414 million DAUs, offers attractive strategic value to many tech giants and larger tech peers.

Reportedly, before Snap's IPO in 2017, there were several acquisition offers, the most famous of which was Alphabet's $30 billion acquisition offer in 2016. Since its IPO in 2017, media reports have periodically speculated that Snap is a potential acquisition target, especially when its stock price performs poorly.

Evan Spiegel has always stated his desire to keep Snap independent, and both Evan Spiegel and co-founder Bobby Murphy have voting control over Snap. However, the two co-founders also acknowledge the reasonable possibility of future acquisition by a major tech giant (or through issuing new shares and strengthening cooperation for strategic minority investments).

After all, acquisition offers can still provide independent conditions for Snap and its founders to continue leading the company post-acquisition.

Potential acquirers such as Microsoft, Amazon, or Alphabet (all of whom have existing partnerships with Snap) are led by non-founding CEOs, with no dedicated social media businesses except for Microsoft, which owns a social networking enterprise. These three tech giants compete with each other in multiple areas such as cloud computing, Meta platforms, and TikTok, enhancing Snap's attractiveness as an acquisition target. Additionally, as part of the acquisition, these tech giants can provide independent guarantees for Snap's founders.

In a recent earnings call, Evan Spiegel expressed frustration with Snap's poor financial performance and analysts' predictions of potential underscaling. Furthermore, Snap faces much larger competitors such as Meta and TikTok, meaning Snap is engaged in a difficult competition with major competitors, a sentiment seemingly echoed by Evan Spiegel. Evan Spiegel described TikTok as a "billions-of-dollars user acquisition" and "subsidizing large-scale user acquisition." Then there is Meta's dominance in its platform and resource scale, as well as Meta and TikTok's superior algorithms and AI technology.

Ultimately, I believe Snap's founders may decide in due course that the company must strengthen its cooperation through acquisition or strategic minority stakes with one of the major tech giants to successfully challenge formidable competitors. Given Snap's massive user base, undervaluation, and the unique possibility of having its scale in the oligopoly-dominated market of communication social media platforms, Snap's private media value would be more than double its current stock price.


Recent or Rebuilt Strategic Partnerships Expected to Catalyze Stock Price

In addition to the potential for long-term acquisitions, I anticipate that Snap will announce further new partnerships in the coming months or in the latter half of the year, bringing short-term catalysts to the stock price, which will translate into increased company revenue. Over the past few months, Snap has forged numerous partnerships with major tech peers. However, only a fraction of investors have taken note of these favorable opportunities regarding subsequent stock price movements.

Snap struck a partnership with Amazon last November, allowing users to purchase Amazon products from ads on Snap. Last month, Spotify also expanded its long-term partnership with Snap. Snap has also partnered with Microsoft's MyAI sponsors and has integrated CpenAI's ChatGpt into MyAI chatbots.

When considering the arms race in the field of artificial intelligence among tech giants, as well as the ongoing battles between tech giants and large tech and non-tech peers, it becomes evident why major tech companies would seek to collaborate with Snap and leverage its audience of 414 million DAU.

For instance, following its advertising partnership with Amazon, Pontey announced a partnership with Google Ads last month. Perhaps Snap should consider establishing similar advertising partnerships with its cloud provider, Google, in the future.

Reddit recently announced a $60 million deal in which Google will pay Reddit to license its Google large language model AI training data. Reddit stated that it will receive a total of $203 million in LLM training fees over the next three years. In addition to single-modal AI models trained on text databases, the next natural area for licensing agreements seems to be multi-modal AI models analyzing video and audio inputs. Therefore, Snap may be poised to reach licensing agreements in the future and collaborate with existing tech giants to license its social media visual content.



After Snap announces its earnings, I have a strong buy recommendation for the stock and believe that confidence in the stock is excessively underestimated below $11. The company possesses a strong user asset base and multiple recent catalysts. Over the longer-term 12-month outlook, based on the following neutral, optimistic, and pessimistic scenarios, my expected target price for returns is $17.1 (up 58% from $10.73):

In the neutral scenario, with the stock rising to $17, I estimate a 50% probability that Snap will achieve an 11% revenue growth in 2024, reaching $5.1 billion, with a market cap-to-revenue ratio of 5.5x ($28 billion), still 30.8% lower than Pinterest's current ratio of 7.95x.

In the optimistic scenario, with the stock rising significantly to $22, I believe there is a 30% chance that Snap will achieve a 16% or higher revenue growth in 2024, reaching $5.33 billion. At this point, the market cap-to-revenue ratio would be 6.81x ($36.3 billion), 14.3% lower than Pinterest's current ratio.

Additionally, in the pessimistic scenario, with the stock falling to $10, assuming Snap achieves low to mid single-digit revenue growth in 2024, there is a 20% probability of failing to meet revenue growth expectations for 2024. Assuming revenue is at least $4.83 billion, the market cap-to-revenue would be 3.4x or lower. Considering this significant sales discount, I believe the downside in price is limited.

I believe that Snap's current price is attractive to both short-term traders and long-term investors, with their investment goals focused on the rebound in the latter half of this year and next year.

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