Snap Inc. (Ticker: SNAP) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Company Description
Snap Inc. is an international camera company that offers Snapchat, a camera application that allows people to communicate through short videos and images called Snaps. Snap also owns Spectacles, a hardware product that connects with Snapchat and captures video from a human perspective. Snap also created Bitmoji and contextual stickers that allow users to customize Snaps. SNAP provides Stories, Memories, voice and video calls, Discover, and a Map that allows you to use GPS coordinates to share locations with friends
Quantitative Analysis
At the time of this writing (10/24/2021), SNAP is trading at $55.14 with a 52 week range of $37.35 - $83.34 and a market cap of $88.76B. In Q3 of 2021, revenue increased 57% year-over-year (YoY) to $1,067 million. Net loss improved 64% to $72 million YoY, adjusted EBITDA improved 209% to $174 million, and free cash flow was $52 million compared to a loss of $70 million in the prior year. Return of equity (ROE: Net Income / Total Equity *100) of SNAP is -24.02% and net margin (net income / revenue) is -16.72%. The debt to equities ratio (total liabilities / total equity) is 1.07. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view SNAP’s 2021 Q3 earnings here and their 2020 Annual Report here.
Qualitative Analysis
Snap is one of the most popular social media brands and is currently trying to break into the field of augmented reality. Recently Snap reported poor quarterly earnings, including a revenue miss due to the advertising side of their business (they cited Apple’s privacy changes as a large contributing factor). Previous quarterly earnings demonstrated improvement in its operational execution, innovations, and in the digital ad space, but the change to Apple’s privacy rules show how easily and quickly things can alter revenue streams for social media sites that rely heavily on user data. Snap has added a great user experience to Snapchat by adding Bitmoji, various filters, geotracking with discover and memories that keep users on the platform. Snap has become a driver in the camera space, although it is difficult to create a moat in this industry and it seems that every time Snap comes up with a new feature, another social media application copies their new feature (and in some cases improves upon it). Snapchat relies heavily on “network effects” to onboard new users and feature addition to keep existing users coming back. The new challenge for Snap, as well as many other large social media platforms, is to diversify revenue streams away from advertising as companies like Apple create policies that protect user data.
Bullish Thesis
Here are three points to support the bullish thesis:
Network Effect: Network effect can be talked about for all social media because users will not be able to see what their friends or celebrities are doing if they are not currently using the app. Snapchat is a unique social media app due to the fact that the main purpose of the app is to send photos to friends within the app and photos/messages disappear after being seen. This makes Snapchat more of a messaging application with a social media aspect with memories, stories, geotracking, and other features, therefore in order to use the best features of the application there needs to be multiple users.
Augmented Reality Technology: Snap has become a big player in the augmented reality space because of its ability to overlay digital images and other information on photos, videos, and even in a person’s field of view. Snap has used this technology to create a feature called “TrueSize” which allows consumers to use augmented reality throughout their shopping experience. Companies are already beginning to use this technology. For example, FarFetch is a clothing company that allows consumers to virtually try on and shop with their jackets. Nike is also integrating Snap’s technology as part of its “Play New” advertising. These are encouraging because with the recent change in Apple’s privacy changes, Snap needs to find new ways to generate revenue.
Continual Innovation: As mentioned in the qualitative analysis above, Snap has gotten the reputation as being a very innovative application with updates and changes occurring frequently. Due to Snap’s size compared to giants like Facebook and Twitter, Snap does not have as many hoops to jump through to roll out a new aspect of the application. Snap continually changes and updates their app and has moved the industry into more of a user friendly experience with the addition of stories, discover, memories, filters, and tagging locations which allows users to connect with one another in ways that other applications cannot.
Bearish Thesis
Here are three points to support the bearish thesis:
Increased scrutiny on social media platforms: As the mega social media companies grow, they’re bringing with them an increased level of public scrutiny. There are growing concerns over the effects of these platforms on metal health, particularly anxiety and depression. If consumers become more aware of these deleterious effects, they may decrease usage or entirely opt out. In addition to concerns over both short- and long-term health consequences of social media use, these platforms are increasingly facing challenges to their use of customer data. As companies like Apple change their data privacy and ad tracking policies to make it more difficult for advertisers to create and deliver user-specific ads (see more on this below), companies who generate revenue via user data will need to find other ways to bring in cash. Time will tell whether SNAP is able to do so.
Increasing competition for your attention: In the digital age, companies are largely competing for your attention. Unfortunately for SNAP, there is no lack of companies competing for user eyeballs - including YouTube, Instagram, Facebook, Twitter, TikTok, Netflix, and Hulu. Even for users looking to use SNAP as a communications tool rather than an entertainment platform, better options exist (at least in my opinion) - including iMessage, FaceTime, WhatsApp, and Signal. With the introduction of disappearing messages on encrypted platforms like Signal, Snapchat lost one of the features that made it unique. Anecdotally, I don’t use SNAP nearly as much as I did 3-4 years ago, largely because the features being added seemed outside of my demographic and designed more for young children.
Heavy advertising dependency: Snapchat is heavily dependent on advertising for revenue. In fact in 2018, 2019, and 2020, advertising accounted for 99%, 98%, and 99% of revenue, respectively. If - for whatever reason - SNAP loses access to advertisers (e.g., increased user data protection, increased public scrutiny on the platform), they could lose a substantial amount of revenue. Just last week SNAP stock fell nearly 22% after reporting a net loss of $72M, citing changes to Apple’s data privacy and advertising tracking policies. While most other social media platforms are in a similar boat, other major competitors like Facebook have found ways to diversify revenue (e.g., through acquisition of Oculus, which includes hardware sales).
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.