Snap (SNAP) is a unique company in the social media space. The company that reinvented the camera and its multiple potential applications around the smartphone operates in an exciting industry. However, while Snap has proven to investors that it can grow its app and its revenues successfully, it’s pretty hard to tell what the future looks like for the company.
Meta Platforms (FB), for example, is wildly profitable, while it has already started investing in the next phase the industry is likely to move towards. According to Meta Platforms, this is going to look like an AR/VR-powered world. Snap is in a unique situation because while the company had an industry-leading position in the AR space, we have gotten no news on how its platform will look in the medium-term. Considering that the company remains unprofitable, it may be the case that by the time Snap makes a profit, it will be too late to the party, with social media crowds potentially moving towards the Metaverse.
Simultaneously, despite Snap’s growing financials, the stock continues to trade at what I consider an expensive multiple, without any tangible justification whatsoever. For this reason, I remain neutral on the stock.
Q3 Results Didn’t Excite
Snap’s Q3 report was slightly disappointing. The numbers weren’t necessarily bad. Revenues came in at $1.06 billion, 57% higher year-over-year. Adjusted EPS reached $0.17 (the company remained unprofitable on a GAAP basis), 100% higher than analyst estimates, while Adjusted EBITDA reached $175 million, beating the company’s estimates of $100 million – $120 million.
The disappointing part was management’s guidance, which pointed towards revenue growth between 28% to 32% year-over-year to $1.165-$1.205 billion. This pace implies a considerable deceleration for the company, and it is certainly frustrating since it implies profitability will not scale as fast as previously expected.
The main problem here is due to the advertising business being disrupted by the recent changes to iOS ad tracking that were broadly rolled out by Apple (AAPL) in June and July. Sure, investors expected some degree of business disruption, but apparently, Apple’s update is making it significantly more difficult for Snap’s advertising partners to measure and manage their ad campaign for iOS. This is very concerning for Snap, as unlike Meta’s own platforms, which are popular amongst desktops and android users as well, Snapchat is over-reliant on its iPhone users. Hence the weak guidance.
For this reason, I believe that stock offers little to no margin of safety at 2.14 times this year’s sales at its current price levels. From a net income perspective, Snap is trading at 87 times its FY2022 potential EPS. I don’t see how these multiples are justified, especially with the recent iOS headwinds. Hence, my neutral position.
In my view, investors who want exposure in the space have a greater total return potential in Meta Platforms. It is trading at a much more attractive valuation while actively returning cash to shareholders through share buybacks, increasing the predictability of the stock’s total return profile. Snap clearly lacks in that regard.
Wall Street’s Take
Turning to Wall Street, Snap has a Strong Buy consensus rating, based on 20 Buys and six Holds assigned in the past three months. At $75.88, the average Snap price target implies 47.86% upside potential, nonetheless.
Disclosure: Nikolaos Sismanis did not have a position in SNAP shares at the time of publication, but had a beneficial long position in the shares of FB through stock ownership.
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