Snap Q1 2022 – Tik Tok? What TikTok?

Snap survives TikTok.

• Snap reported good Q1 2022 results that were more impacted by Russia than they were by TikTok raising the possibility that TikTok’s incursion into Western markets may be slowing down.
• Q1 2022 revenues / EPS were $1.06bn / LOSS$0.22 which was slightly behind estimates of $1.05bn / LOSS$0.19 but the good news was to be found in the subscriber numbers.
• Here, DaUs were 332m, ahead of the 331m consensus estimate and crucially up 18% YoY.
• The company did experience the cancellation of campaigns following the commencement of hostilities in Ukraine but these have since recommenced.
• Hence, the impact on the overall quarter from Russia was minimal meaning that there is probably still some effect from TikTok as well as Apple’s restrictive advertising tracking policies.
• However, guidance going forward remains fairly good with the company expecting growth of 20% to 25% in the coming quarter.
• This is below forecasts of 28% but it is clear that the market was expecting worse news which is why the shares rallied by 12% in after-hours trading.
• That does not mean that the shares are fairly valued and even the recent 50% correction fails to inspire me.
• Snap still makes no money and the outlook for it to break even and return a profit consistently is very uncertain.
• However, it does generate cash mainly because a very large portion of the operating losses it reports are due to the grant of stock options to employees.
• For example, in Q1 2022 the company lost $271m but also ran $275m of stock options through the income statement.
• This is the main reason why the company is able to generate about $130m per quarter in cash flow despite its headline numbers indicating a loss-making business.
• Including seasonality, this amounts to around $600m in cash flow from operations per year.
• Net of tax, this will be around $480 and so the real question is whether this is enough to support a market value of $47bn.
• If the company was to grow at 8% in the long-term and with a cost of capital of around 10%, this would value the cash flows at $24bn in today’s money.
• Hence, the short answer is no it cannot and so I continue to see no fundamental support for the company here and expect that it will continue to correct to the downside should interest rates continue their steady upward march.
• Much more interesting is Peloton which using the same approach (see here) should it sort itself out, could result in the shares doubling.
• I am not rushing out to buy Peloton but my interest is piqued and I am looking for the new CEO to kitchen-sink expectations before I would consider getting involved.