Snap Q3 2022 – Revaluation

Snap is heading towards value territory.

• Snap reported Q3 2022 results that missed expectations slightly but the resulting crash in the share price is a clear indication that the valuation of the company is still above where it needs to be (although it is getting close to something more reasonable).
• Q3 2022 revenues / Adj-EPS were $1.13bn / $0.08 below revenue estimates of $1.12bn but ahead of Adj-EPS estimates of LOSS$0.01.
• Daily Active Users grew by 19% YoY to 363m and the company generated good cash flow of $185m but this was not enough to offset the cautious tone of management commentary.
• Here, the company declined to provide revenue guidance for Q4 2022 as the combination of the volatile macro conditions and the impact of Apple’s advertising policies remain highly unpredictable.
• However, the company did admit that YoY revenue growth would continue to decelerate raising concerns that the company starting to stall in terms of growth.
• This is what spooked the market and caused the shares to decline by 28% on the day.
• This was clearly a Snap-related issue as the other advertising-driven ecosystems, Alphabet, Meta & Pinterest also declined sharply but rallied with the market towards the end of the day.
• The problem that Snap faces is twofold:
  • First, valuation: which remains at a level where significant growth is still being priced in.
  • Even after the 28% decline, the shares are still trading at a 2022 EV / revenue of 2.7x meaning that the shares still need to fall by 25% before they hit 2.0x EV / revenue.
  • It is at this point that I would consider them to be knocking on the door of value territory at which point one might expect to see a bottom.
  • Second, augmented reality: which remains the company’s bet for the long term.
  • The problem here is time as RFM does not expect the Metaverse in any form to start hitting the mainstream much before 2028 or 2029 making for a long wait.
  • Consequently, outside of amusing graphical annotations to short videos, the investments that Snap are making here are going to take a very long time to see any real return.
  • Furthermore, competitors like Meta and Apple are investing very heavily in this area and will be able to outspend Snap many times over.
  • Hence, it will be very difficult for Snap to come up with a product that is best-in-class and be able to compete with whatever its much larger and better-financed rivals come up with.
• Despite its challenges, Snap is very far from being in financial difficulty as it has $4.4bn in cash and marketable securities and it’s $3.7bn in debt is convertible.
• Furthermore, the company is generating cash which should grow as cost cuts and streamlining come through.
• Hence, I don’t think that Snap is in any real financial danger meaning that a forced takeover is unlikely.
• However, it is clear that the shares remain overvalued in the current environment and there is plenty of space for them to fall further especially as the number of shares in issue continues to grow inexorably.
• The bottom is not in, but it is definitely getting closer.