Snap's (SNAP -2.98%) stock recently dropped below its IPO price of $17 after it unexpectedly cut its second-quarter guidance on May 24.
In its first-quarter earnings report on April 21, Snap had predicted its revenue would rise 20% to 25% year-over-year in the second quarter, and that its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) would decline 57% to 100%.
That outlook was already grim, but Snap now expects both its revenue and adjusted EBITDA to miss the lowest end of that guidance. Snap blamed that downward revision on the "macroeconomic environment," which "deteriorated further and faster than anticipated."
Image source: Getty Images.
That dire warning indicates there's still a lot of pain ahead for Snap's investors, 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 bear and bull cases for Snap to see if it can fulfill those goals.
What the bears will tell you about Snap
The bears will tell you that Snap has a track record of over-promising and under-delivering. During its investor day presentation last February, Snap's senior product director Peter Sellis told investors the company could still grow its annual revenue by about 50% for "multiple years."
That bold promise drove Snap's stock to an all-time high of $83.11 last September. However, Snap underestimated the impact of Apple's (AAPL 0.98%) privacy changes on iOS, which started throttling its growth in the second half of 2021, as well as the weed-like growth of ByteDance's TikTok. TikTok notably surpassed Snapchat as the favorite social network for U.S. teens in Piper Sandler's latest semi-annual survey, which abruptly ended Snapchat's long reign as the teen leader.
In addition to those challenges, Russia's invasion of Ukraine blindsided Snap's European business in the first quarter. Rising interest rates, which are aimed at throttling economic growth to tame inflation, will also likely curb the market's appetite for digital ads.
Snap hasn't abandoned its goal of generating 50% sales growth over the long term, but its decelerating growth in daily active users (DAUs), average revenue per user (ARPU), and revenue over the past year indicate that dream is likely dead:
|
Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
DAUs |
22% |
23% |
23% |
20% |
18% |
|
ARPU |
36% |
76% |
28% |
18% |
17% |
|
Revenue |
66% |
116% |
57% |
42% |
38% |
Data source: Snap. YOY = Year-over-year.
Snap also can't generate stable profits on a generally accepted accounting principles (GAAP) basis yet. Its net loss narrowed from $945 million in 2020 to $488 million in 2021, yet widened year-over-year from $287 million to $360 million in the first quarter of 2022. Snap's high stock-based compensation expenses, 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 foreseeable future.
As Snap's growth decelerated and its stock crashed, its insiders headed for the exits. Over the past 12 months, they sold 12 times as many shares as they bought.
But even after all that selling, the stock still can't be considered a screaming bargain at four times this year's sales. Meta Platforms (META -1.93%), which is larger and more profitable than Snap, also trades at four times this year's sales and just 16 times forward earnings.
What the bulls will tell you about Snap
The bulls will point out that Snap didn't reduce its guidance for 343 million to 345 million DAUs in the second quarter, which would still represent 17%-18% growth from a year ago. Therefore, Snapchat is still expanding at a healthy rate, but its ads face cyclical headwinds. Once those headwinds dissipate, its revenue and adjusted EBITDA growth could stabilize again.
The underlying demand for Snap's ads is still high. In its first-quarter report, the company revealed that upfront commitments from its agency and advertising partners had already risen more than 60% year-over-year. It also expects to overcome Apple's changes with more first-party data tracking services, and to continue expanding beyond its traditional ads with more augmented reality (AR) features, games, and short videos.
Snap also still has plenty of liquidity to implement those changes as it rides out the incoming 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.
Lastly, Snap's depressed valuations could make it a tempting takeover target for Meta, which repeatedly tried to buy the company before its public debut, or another major tech company.
The 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.
