Snap – Oh snap!

Crunch looks to be limited to Snap.

• Snap has warned that growth will be slower than expected when it gave its Q2 2022 guidance just one month ago highlighting internal weaknesses as its competitors saw this coming and called it out at their results last month.
• On April 21^st 2022, Snap said that it expected that Q2 22 revenues would grow by 20% to 25% YoY but then had to file an 8K yesterday stating that growth will be below the bottom end of this range (see here).
• How far below the company did not say but it is slowing hiring and looking for cost cuts which imply that this is more than a blip.
• This was enough to send the share price down 29.9% in after-hours trading and it took the other advertising-funded players Meta (down 6.6%) and Google (down 3.7%) with it.
• The company is laying all of the blame on the macro environment where the usual excuses of inflation, interest rates, supply chain and Ukraine have all been trotted out.
• It is possible that something else is going on here and that while the macro environment is undoubtedly challenging, not much has changed in the last month.
• 30 days ago, interest rates were rising, inflation was high, supply chains were snarled-up and the Ukraine situation had already occurred.
• My point is that all of these factors were known quantities 30 days ago and they have not materially changed between April 21^st and today.
• Consequently, these should have been taken into account at the time leaving us with two possibilities.
• Either Snap’s management is very bad at understanding its end markets or something else has happened that the company does not want to tell the market about.
• Meta Platforms saw this coming and was smart enough to call it out and include it in its Q2 2022 guidance.
• Meta Platforms guided much more conservatively for Q2 2022 forecasting revenues that will be down between 3.7% YoY and up 3.1% YoY.
• This guidance takes into account the macro headwinds, Apple’s data tracking policy as well as the war in Ukraine.
• Hence, this looks like a slip-up by Snap’s forecasting department and highlights that management does not have very good visibility of its end markets.
• This adds risk to the company as other nasty surprises may take the company unawares which is now beginning to be reflected in the 30% decline in the valuation.
• Even after a 30% hit, the company still has a market capitalisation of $26bn and an enterprise value of $24.7bn.
• If revenues grow by 20% for the full year (Q1 2022 was 38% YoY), the company is still on 4.9x 2022 EV / Revenues and is making losses although it does just about break even on a cash flow from operations basis.
• This warning will reduce faith in management, and I think the valuation still looks expensive in this environment.
• Hence, I don’t think the bottom is in and there could be further weakness ahead.
• I think that this will be fairly contained to Snap as its competitors saw this coming and included it in their forecasts.
• I continue to have no desire to go bottom fishing on Snap as it has yet to become a bargain.