Snap: Massive Discount To Peers In Social Media Oligopoly And Strategic Value Brings Stock Price Catalysts
Contributor since 2019 / 496 Followers
Summary:
- Snap results disappointment is due to macro factors whilst the company grows MAUs above 800 million.
- In a social media oligopoly, Snap trades at a deep discount in sales multiple to leader Meta and similar comparable Pinterest.
- A rebound in brand advertising, Snapchat+ subscriptions, and India growth will be major revenue drivers.
- Snap will continue to be an attractive potential buyout target for the tech giants and founders may acquiesce.
- Further strategic partnerships with larger tech peers are expected in the nearer term.
Tero Vesalainen
Summary
Perennial underperforming social media stock Snap (NYSE:SNAP) missed expectations in its latest quarterly results on 6 February, triggering a more than 30% decline in its stock price, after a previous major run-up following positive sentiment in the stock prior to quarterly results. Snap’s revenue of $1.36billion rose by 5% YoY and missed expectations by $20m. The company registered a 10% YoY increase in its platform Snapchat’s Daily Active Users (DAU) to 414million albeit driven by user growth in lower Average Revenue Per User (ARPU) rest of world markets. Total revenue in 2023 was $4.6billion and Snap at its current stock price of $10.73 trades ($17.71billion market cap) at 3.85x 2023 revenue or 3.89x EV/2023 revenue. Net loss for FY2023 stood at $1,322million vs $1,430million in FY2022. With its latest result disappointment, sentiment in the stock has shifted to be negative again. Long-standing concerns have resurfaced on the platform’s losing advertising spend to Meta Platforms (META) and on Snap’s ability to achieve profitability. Snap essentially generated no revenue growth in 2023, vs 16% revenue growth for Meta, which illustrates the negative perception of the company’s losing advertising spend to Meta’s platforms.
That being said, Snap at 3.85x 2023 sales and potentially 3.47x 2024 sales assuming $5.106billion in revenue in 2024, trades at a massive discount in Price to Sales to Meta Platforms (9.47x) and Pinterest (PINS) (7.95x). Both Meta and Pinterest stock price have massively outperformed Snap in the past 12 months, with Meta up 172.8%, Pinterest up 43.7% whilst Snap is only up a paltry 5.6% in the past 12 months.
Successful niche visual discovery social media platform Pinterest ($24.4billion market cap) represents a close comparable to benchmark Snap against. Pinterest with 498 million monthly active users (“MAU”) trades at a Price/Sales of 7.95x versus Snap’s 3.85x revenue and Snapchat’s more than 800 million MAUs. Pinterest is profitable assuming a non-GAAP basis and has a higher EBITDA margin than Snap but the valuation gap between the two peers looks far too wide, particularly given the greater asset value of Snap in terms of a far larger user base and higher user ARPU. Pinterest has global ARPU of $2 as at Q4 2023, and ARPU of $8.07 (+6% YoY) for North America. Snap has global ARPU of $3.29 as at Q4 2023 and ARPU of $8.96 (+2% YoY) in North America. Besides this, smaller (and negative free cash flow) social network bulletin board company Reddit appears to be pricing its IPO at a 2023 sales multiple of at least 6x, and its recent data licensing agreement with Alphabet has led to it being considered an “AI play”. I see the market ultimately realizing the current significant undervalue in Snap relative to comparable peers, especially with the IPO of Reddit at its anticipated valuation.
Further, two growth bright spots within Snap are in its India and Snapchat+ subscription business. Snapchat has over 200m MAUs in India, and it has doubled its MAUs in a year. In India, where TikTok was banned in 2020, Snapchat is in a communications social media oligopoly with Meta’s platforms. Assuming a future 300 MAUs in India in 2024 or 2025 and $1 in APRU, provides a $300million annual revenue. Snap’s fast growing subscription service Snapchat+ which launched in 2022 now has over 7million users. Assuming 10million users this year and $39.99 annually and this works to $400million in annual revenue. Combined this is $700m in projected revenue. Both the India and Snapchat+ segments can grow beyond these projections beyond 2024 and ultimately to a $1billion annual revenue run-rate in my view. These are solid incremental revenue contributors and combined with an assumption of reasonable high-single digit to double-digit growth returning to North America advertising this year, represent meaningful revenue growth catalysts for Snap. At a potential 3.47x its forecast 2024 sales, Snap doesn’t need to show Meta-like revenue growth this year but just a solid revenue growth improvement in the low double digits for its stock price to significantly re-rate higher.
Although Evan Spiegel has stated a consistent desire to keep Snap independent, I view a buyout of Snap in the future cannot be ruled out, and Snap’s private market value is far higher than current levels. Irrespective of buyout potential, Snap offers attractive strategic and scarcity value to a number of the tech megacaps and larger tech peers in their partnering with Snap. This is especially since there is an ongoing battle of the tech titans broadly in AI as well as in the areas of video, audio streaming, e-commerce and payments. This further enhances the attractiveness of Snapchat as a platform and user base for the larger tech companies to partner with across these areas. Therefore, I expect further new and enhanced partnerships that Snap will announce this year bringing near-term stock price catalysts, that will translate into increased revenue for the company.
The current challenges of Snap and expected rebound in 2024
Snapchat’s DAUs in North America was essentially unchanged quarter on quarter from 101million DAUs in Q3 2023 to 100 million DAUs in Q4 2023, and unchanged from DAUs a year ago in Q4 2022. Although revenue grew 5% YoY from $1.3billion in Q4 2022 to $1.361billion in Q4 2023, North America revenue only grew 2% YoY from $880million in Q4 2022 to $900million in Q4 2023. Given the contribution from growth in Snapchat+ subscription which grew from 2million subscribers in Q4 2022 to 7million in Q4 2023, advertising revenue in North America actually would have decreased year-on-year. Snap’s brand-oriented advertising business declined 3% year-on-year, while its direct-response advertising business grew 3% year-on-year. Given the larger contribution of brand-oriented advertising to Snap’s advertising revenue, we can see how North America advertising revenue would have declined overall.
There are several possible factors for Snap’s current challenges in advertising revenue. In 2023’s advertising environment rebound from 2022’s slowdown, advertisers are more selective in opting for the most dominant social media advertising platform for spend (eg Meta Platforms and TikTok) versus less essential platforms. Snapchat’s main user base is amongst Gen Z, Gen Alpha and younger Millennial users, amongst whom it has varying degrees of daily time usage engagement and who use different functions within the app.
Snapchat’s original function when it first began in 2011 was as a disappearing photo messaging app. Snap has exceled in product innovation and has pioneered social media features since such as Snapchat’s Stories (subsequently successfully replicated by Instagram) and Lenses (an amazing range of photo and Augmented Reality filters), amongst numerous other in-app features. Whilst there are multiple functions/products within the Snapchat app (Stories, Spotlight, AR, Maps etc), its popular core original function of messaging to a known network of friends (Lenses -AR and photo filter messaging) is a lower time engagement product in terms of average user time spent and ability to monetise in advertising.
Generally, I believe there are varying degrees of usage amongst Snapchat’s Gen Z/Y/Alpha core user base. On the one end, there are heavy daily users of the app’s multiple functions (Snapchat’s ads appear in its Stories, Discover and Spotlight functions) who spend longer time on the app and provide the engagement necessarily for direct-response advertising analytics (similar to users on Facebook, Instagram and TikTok). On the other end, there are those who use Snapchat primarily for its original messaging/photo messaging or its photo and AR filters with a lower daily time engagement and which are more challenging to monetise with ads. This is the same monetization dilemma faced with other messaging/chat platforms such as WhatsApp – chat messaging itself is not a product in which direct-response ads can be used (assuming a privacy-oriented chat product). Instead, chat function monetization (outside of advertising) can come from in-app purchases and other multi-purpose functions (payments, e-commerce etc) such as in the case of the Line and WeChat apps, which are respectively popular in different parts of Asia and China. Snap’s Snapchat+ subscription service is a good start for Snap in paid services and rolling out further non-advertising, paid in-app products.
Snapchat’s amazing range of filters and Augmented Reality Lenses are fantastic for their specific purpose and sending in chats but there are no ads within the Lenses and chat functions except for occasional sponsored Lenses by typically large brand advertisers. For those users who are primarily using only the chat and Lenses functions in Snapchat, Snap is ultimately providing a very low ads service function which Snap has invested significantly in terms of product innovation costs, to users with low revenue monetization. Hence, this partly explains why Snap has an ARPU of $8.96 in North America versus Facebook’s North America APRU of $68.44. In a more selective advertising environment, the varying engagement levels of Snap’s user base is likely a factor in direct-response advertisers’ preference to advertise on Meta’s “essential” platforms. Meta’s Facebook and Instagram cover all user age demographics with high time engagement and activity well-suited for direct-response advertising engagement.
Snapchat also has also always been more privacy focused of an app for messaging friends (e.g. its original core function of disappearing photos messaging to friends), which has made it more suited to and traditionally a brand-focused ad business and high-funnel advertising, versus direct-response ads and low-funnel advertising (Snap has recently positioned an “anti-social media” advertising campaign highlighting its app’s long-standing communications amongst close friends focus). Both Meta’s platforms and TikTok are the leaders in their ability to provide highly-targeted direct response ads relevant to their user’s interests, from the nature of their core engagement functions and their leading algorithms and data tools. Take for instance, TikTok’s app which detects the sim card country carrier of the mobile user and sets its app country and content accordingly. This is ideal for their direct-response ads and highly targeted advertising success.
Snap stated in its investor letter that the conflict in the Middle East affected two percentage points of revenue growth in Q4, presumably from the impact of cautious brand advertising spend amongst large advertisers and illustrating its reliance on brand advertising. Although Snap has been working to improve its direct response ad business, it has been described as significantly behind Meta still, besides Meta’s size and aggressive machine learning and AI spending.
Snap has guided for revenue of $1,095 million to $1,135 million in Q1 2024, translating to year-on-year revenue growth of 11% to 15%. In a consumer rebound and broader advertiser spend with a lower rate environment into the 2nd half of 2024 and 2025, brand advertising can be expected to rebound whilst direct response advertising spend can see a greater allocation to a less “essential” advertising platform of Snap. Therefore, Snap’s slow rebound in revenue growth last year may be the product of both Snap being a nice to have but not essential advertising platform for certain advertisers and the still recovering macroenvironment, and its revenue growth should accelerate as there is a broader consumer and advertising rebound later this year.
Importantly, Snap’s user base and popularity is not impaired as shown by its user growth but its current headwinds in my view are the result of both the described long-time characteristics of the app, and the early stage of a rebounding macroenvironment. The communications social media oligopoly dynamics in North America has not changed significantly in the past few years; Snap is still in third place behind Meta’s platforms and TikTok, and Snap has continued to grow its overall user base in the time since. A rebound of meaningful revenue growth can be delivered on in 2024. An 11% revenue growth forecast for 2024 looks highly attainable, and Snap can surprise to the upside as branding advertising rebounds, a broad-based rebound in the advertising market increases direct-response ad allocation to Snap, and Snap’s recent partnerships and subscription service contribute to revenue as well.
The macroenvironment environment in 2H 2024 will provide dual tailwinds to Snap
The tech mega-caps and large caps that have been delivering significant revenue and profit growth have been well-rewarded with large stock price rises since the start of last year. I view that the current macroenvironment (solid US economy, recession to be avoided, recent slower inflation declines data, rate cuts only likely to begin in the later part of the year whilst remaining elevated vs pre-tightening cycle levels) will continue to reward this category of large cap tech outperformers.
At the same time, large swaths of unprofitable tech stocks with impacted growth remain down big from their peaks in 2021, being punished in the elevated rate/risk premium environment. That is not to say that tech companies need to deliver net income profit and growth in this environment for their stock prices to be rewarded, but they do need to deliver growth.
For instance, Spotify which remains unprofitable but has demonstrated significant growth in both latest quarter revenue (+16%) and users (+23% MAUs) in its results, is up 115% in its past 1-year stock price. Snap’s market cap of $17.7billion is dwarfed by Spotify which has a market cap of $50billion and 602million MAUs (vs Snap’s over 800million MAUs). Audio streaming is arguably a more competitive environment than communications social media’s oligopoly, with tech behemoths Apple, Alphabet, Amazon each competing against Spotify. Tech stocks that are growing in both revenue and users above expectations even as they forego net income profitability can continue to do well in stock price performance. I do view it is possible for Snap to achieve similar revenue growth (in the mid-teens percent) as Spotify this year.
I believe that Snap stock will benefit from a declining rates/declining inflation and stronger consumer environment this year via two drivers. The first being from the already described recovery in brand advertising and increased direct-response advertising to Snap outside of the “essential” platforms. The second is that as inflation data continues its downward trend (potentially next month) as we move closer to rate cuts in the 2H of this year, the required risk premium decreases and unprofitable tech companies will see a sustained uplift in stock prices (versus current shorter term upward and downward momentum presently depending on rates sentiment).
We are already seeing more speculative and forward-looking unprofitable growth areas of the market seeing a recent rally. As its stock price hovers below $11 currently, I have a strong tactically bullish view of Snap for a near-term price move higher.
A future buy-out is possible and strategic value of Snap provides margin of safety
Snap is third place in a global (ex-China) communications social media oligopoly, behind Meta’s platforms and TikTok. Nonetheless, being an oligopoly type market and with Snap’s 414million DAUs, it offers attractive strategic value to a number of tech giants and larger tech peers. There were several buy-out offers reportedly made for Snap prior to its IPO in 2017, most notably Alphabet reportedly having made a $30billion offer in 2016. Since its 2017 IPO, media reports periodically speculate of Snap as a potential takeover target, especially when its stock price significantly underperforms.
Evan Spiegel has stated a consistent desire to keep Snap independent, and Evan Spiegel and co-founder Bobby Murphy have voting control of Snap. However, a future decision by the two co-founders for a buyout by one of the megacap tech giants, (or alternatively a strategic minority investment via new share issuance and an enhanced partnership) could be a reasonable possibility. A buyout scenario can still provide a hands-off independence to Snap and its founders in continuing to lead the company post-takeover.
Potential acquirors such as Microsoft, Amazon or Alphabet (each of whom Snap has existing partnerships with) are all led by non-founder CEOs and do not have social media businesses, apart from Microsoft which has specialized business social network LinkedIn. Each of these trio of tech giants are competing with each other as well as with Snap’s rivals Meta Platforms and TikTok, across multiple areas such as cloud, AI and advertising, enhancing the attractiveness of Snap as a buyout target. Besides, there is a guarantee of independence that these tech giants could each provide to Snap’s founders as part of a takeover.
For example, Microsoft and Satya Nadella has promised and delivered independence with a hands-off approach to its acquired companies such as LinkedIn and Github, whilst bringing the synergies of Microsoft to its acquired companies. After LinkedIn’s 2016 acquisition, LinkedIn’s then CEO Jeff Weiner continued in the CEO role before becoming Executive Chairman in 2020 whilst co-founder Reid Hoffman has served on the Microsoft board since 2017. Evan Spiegel (33) is about 20 years younger (give or take a few years) than each of the CEOs of Microsoft, Amazon and Alphabet and it is plausible to think that apart from remaining CEO of Snap, he could have a broader product leadership/product visionary role in one of the tech giants in a buyout scenario.
In the latest conference call, Evan Spiegel sounded weary at the questions of Snap’s financial underperformance and potential lack of scale versus Meta being posed by analysts. Snap currently is an independent company with founder voting control, but it is not independent from the demands as a public company of quarterly results scrutiny, responding to the pressures of delivering financial results as they underperform (e.g. cutting back on products development and reducing workforce) and negative media reports on its results and stock price underperformance.
Besides, Snap’s facing two much larger rivals in Meta and TikTok means that Snap is in an uphill battle to try to move ahead in position of either of its main competitors, and Evan Spiegel appears to have expressed as much. Evan Spiegel has described TikTok as spending “billions and billions and billions of dollars in user acquisition” and “subsidizing large-scale user acquisition.” Then there is Meta’s dominant position in its platforms and scale of resources, and both Meta and TikTok’s superior algorithms and AI technology.
For Evan Spiegel and Snap as a founder and company that has excelled in product innovation leadership, there must surely be a question – how does one continue to produce their best product innovation, when they do not have the resources and scale to capture the full benefits/upside of a successful product innovation (since it can be successfully replicated at greater user scale by dominant rival Meta) whilst they are bearing the full cost/downside risk of their broader product development and products which fail to successfully monetise (low user monetization and core products which have low monetization by nature e.g. messaging and AR). I think there is also the dilemma that Snap faces in attempting to try to broaden its user age demographics to be a more universal social media platform whereas its core success has been as a specialized platform for younger audiences.
Ultimately, I think the founders of Snap may in time come to decide that an enhanced partnership via a buyout or strategic stake by one of its tech giant partners is necessary for the company to successfully challenge its much larger rivals in its David vs Goliaths battle. I view that the private market value of Snap would be more than double its current stock price given its large user base, low valuation multiple of revenue, and being the sole communications social media platform potentially available of its size in an oligopoly market.
Near term strategic partnerships likely and providing stock price catalysts
Besides the buy-out potential that may take place in the longer-term, I expect further new and enhanced partnerships that Snap will announce in the coming months or second half, bringing near-term stock price catalysts, that will translate into increased revenue for the company. There has been score of partnerships that Snap has entered in recent months with larger tech peers, some noticed (in terms of subsequent stock price move) and some largely unnoticed. Snap entered into a partnership with Amazon in November last year to allow users to buy Amazon products from ads on Snap. Spotify also expanded its long-time partnership with Snap last month. Snap also entered into partnership with Microsoft for its MyAI sponsored links in September, and uses OpenAI’s ChatGpt for its MyAI chatbot.
When one thinks of the arms race amongst the tech giants in AI and the ongoing battle amongst tech giants and larger tech and non-tech peers across multiple areas such as video streaming (Netflix vs Amazon, Apple, Alphabet, Disney and other traditional studios), audio streaming (Spotify vs Apple, Alphabet, Amazon etc), e-commerce (Amazon vs newer entrants TikTok, Shein, Temu and traditional retail giants) and payments (a multitude of much larger companies than Snap competing against each other), we can see the attractiveness for larger tech companies to partner with Snap and tap into its 414million DAUs.
Pinterest announced a partnership with Google Ads last month following an ads partnership with Amazon, and it would seem that Snap should have a similar ad partnership with its cloud provider Google in the future.
Reddit recently announced $60million deal where Google will pay Reddit to license its data for Google’s Large Language Model AI training and Reddit has stated it has a total of $203million in LLM training fees to be derived in the next three years. Beyond unimodal AI Models that are trained in text databases, multimodal AI models that analyse video and audio inputs would seem to be the next natural area of licensing agreements. So it would seem that there could be future licensing agreements that Snap could enter into to license its social media visual content with its existing tech giant partners.
Conclusion
I have a strong tactical buy view on Snap after its earnings and view that at below $11, sentiment is far too negative on the stock and company which has a strong user asset base and multiple nearer-term catalysts ahead. In the longer-term 12month horizon, I have an expected return price target of $17.1 (58% upside from $10.73) based on the following base scenario, blue sky scenario and downside case scenarios:
| Assumed Probability | Scenario Price $ | $ | |
| Blue Sky Scenario | 30% | 22 | 6.6 |
| Base Scenario | 50% | 17 | 8.5 |
| Downside Scenario | 20% | 10 | 2 |
| Expected Return | 17.1 |
In the base scenario of $17 which I assign a 50% probability, Snap registers revenue growth of 11% in 2024 to record $5.1billion in revenue and would trades at 5.5x revenue (a $28billion market cap), still a 30.8% discount to Pinterest’s current 7.95x price to sales multiple.
In a blue sky scenario of $22 which I assign a 30% probability, Snap registers revenue growth of 16% or more in 2024 to record $5.33billion in revenue. The stock would trade at 6.81x revenue (a $36.3billion market cap), a 14.3% discount to Pinterest’s current 7.95x price to sales multiple.
I have a downside-case scenario of a $10 which I assign a 20% probability based on Snap achieving mid to low single digit revenue growth in 2024, thus failing to meet 2024 revenue growth expectations. The stock would trade at 3.4x price to sales multiple or lower assuming at least $4.83billion in revenue. Given that this is a steep price to sales discount to its peers, I view that the price downside is limited.
I view that Snap at its current price is attractive for both short-term traders and longer term investors that are investing for a rebound through the 2nd half of year and into next year.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of SNAP, META, PINS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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