The social media space is so tough now that Elon Musk willingly offered $44 billion for Twitter and Snap (NYSE:SNAP) is only worth $16 billion. The stock is unloved by analysts, yet Snap has traded around $10 for 4 months now. My investment thesis remains Bullish on the social media stock following a 31% rally after the prior call when analysts were fleeing ship.
Prepared For Misery
The digital ad market is clearly very tough, evidenced by weak numbers by social media peers. Meta Platforms (META) reported Q3’22 revenues fell 4.5% and guidance has revenues falling 7.2% in Q4, though currency is expected to impact revenues by ~7.0% in the quarter.
Snap was crushed for stating revenues started the quarter at 9% growth, but the company projected fears of weak holiday spending leading to no growth in Q4’22. Analysts still predict the small social media player will report slow growth in the quarter, yet the average analyst is not bullish on the stock.
The stock now has only 10 analysts with Buy ratings and 28 with Hold ratings. These analysts were all uniformly bullish on Snap when the stock soared above $50 on the path to top $75 back in 2021.
At the peak, Snap had a market cap topping $125 billion, with revenues at only $4 billion last year. Analysts were generally happy to pay up for the stock, but now the view is generally Neutral on the stock despite the far more compelling valuation with a market cap of $16 billion and revenues set to top $5 billion next year.
The whole social media space is moving towards the profit phase and moving out of the spending phase. Snap has historically struggled to generate positive net income, and even adjusted EBITDA has trailed off again the last year.
The sector has completely altered the spending path in the last few months, with Musk slashing employees at Twitter and Zuckerberg finally agreeing to cut 10% of the workforce at Meta. The moves should help Snap further pull back from aggressive spending, leading to some higher margins and sizable profits.
Snap already cut staff by 20% back in August, leading to a $500 million reduction in the annualized cash cost structure relative to Q2’22. The social media company cut ~$450 million in operating expenses that could help lead to strong profits, while also cutting ~$50 million in fixed content costs that could impact usage in the future.
The initial success of Snapchat+ could help Snap close the ARPU gap with Meta. The company claims to remain in a similar trajectory of Meta, where the ARPU jumped from below $5 to nearly $20 over the course of year 11 to year 18.
The Snapchat+ subscription service has already reached at least $50 million in annual net revenues, and more success in this area could quickly close the ARPU gap with Meta and eliminate the reliance on digital advertising. The service currently costs $3.99 per month and offers subscribers new and exclusive features.
The service quickly topped 2 million users, but data from Appfigures suggests subscribers have actually fallen with net revenues down to $4.8 million from a peak of $6.0 million.
As with Twitter, the social media services are looking for ways to offer power users access to premium content to extract higher value from these users versus ads. The digital ad has entered a new competitive phase, and Apple (AAPL) privacy rules limit ad targeting these days.
Snap generated $616 million in adjusted EBITDA back in 2021 on $4.1 billion revenues, so margins were only 25% in the peak revenue quarter of Q4. The large costs savings appear to only get the company back towards the previous levels after spending surged some 50% during 2022.
The social media company now appears set to build on the 2021 adjusted EBITDA totals. Analysts don’t expect much more than a repeat in 2023, but the current estimates have EBITDA topping $1.1 billion in 2024.
Snap shouldn’t trade at 15x EBITDA for 2024. Remember, the market is only a few months away from focusing on 2024 numbers, as the calendar soon flips to 2023.
The key investor takeaway is that Snap is a bargain for the growth potential ahead. A strong subscription service could be a game changer, though the data suggests the social media company needs to boost the service in order to grow subscribers.
Analysts appear far too negative on Snap in a typical sign that the stock hit a low earlier this year.
(Except for the headline, this story has not been edited by PostX News and is published from a syndicated feed.)