Snapchat's Relevance Waning, Yet Priced Too Affordably to Overlook
In a recent financial report, Snap Inc. unveiled its Q2 performance, revealing a mixed bag of results.
The company's overall revenues for the quarter reached $1.345 billion, marking a 9% Year-over-Year (YoY) increase. This growth is a positive sign, indicating a steady upward trend in the company's financial health.
However, the adjusted EBITDA margins took a hit, retreating by 100 basis points. This contraction in margins is a cause for concern, as it suggests that the company is not effectively driving margin expansion.
Snap's current valuation stands at just over 2x sales, representing a steep discount compared to its peers such as Pinterest, Meta Platforms, and Reddit. This undervaluation could potentially present an opportunity for investors.
The company saw a sequential decline in its most important user base in North America, dropping to 98 million users. Despite this decline, Snap's average daily active users (DAUs) in the most recent quarter stood at 469 million, a 9% YoY increase.
The average revenue per user (ARPU) stagnated but saw a 9% YoY increase in North America. North America unique Snap senders showed 2% YoY growth, and video calling saw a significant 30% YoY growth in Snap.
Advertising revenue growth for Snap was moderate, starting at just 1% in April and ending the quarter around "3% to 4%". This growth is lower compared to the industry average, but it's important to note that the advertising market has been experiencing a slowdown due to economic uncertainties.
Snap's management guided for Q3 revenue to fall between $1.475 billion to $1.505 billion, representing 9.6% YoY growth. This guidance suggests a continuation of the revenue growth trend, albeit at a slightly slower pace.
Looking ahead, the main catalyst for Snap is expected to be an eventual focus on cost discipline and margin expansion. The company's net debt balance sheet, with $2.9 billion in cash and $3.5 billion in debt, provides a strong foundation for this focus.
Another potential catalyst could be a takeover, although no specific institutions have been named as potential suitors.
Consensus estimates for Snap's top-line growth are seen as too aggressive, suggesting that growth rates might head lower, perhaps to the mid-single-digits. However, the current valuation of Snap is just over 8x long-term earnings, indicating that the market may be undervaluing the company.
If Snap can successfully navigate its cost and margin challenges, its stock could eventually re-rate around 50% higher to a 3x sales multiple, which would equate to a 12x long-term earnings multiple. This potential re-rating would bring Snap's valuation more in line with its peers.
SNAP was last covered in July with a buy rating. With its solid user base, promising growth potential, and a focus on cost discipline and margin expansion, Snap Inc. remains an interesting investment opportunity for those willing to take on some risk.
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