Snap (SNAP, Financial) is a technology company that is home to one of the most popular social networking apps, SnapChat, a photo and text-based application that helps people communicate with friends via messages that quickly disappear (thus the iconic ghost logo). Creators can also generate revenue with their content, and companies can advertise, reaching a huge audience of more than 750 million daily active users, as of the first quarter of 2023.
I like SnapChat, and I think the app has a lot of potential, but I find hardly any compelling reason now to like Snap shares. There are three main reasons for my bearish outlook: intense competition in the advertising industry, slowing revenue growth and lack of profitability.
Snap introduces a revenue-sharing program as competition continues crushing
Snap generates almost all its revenue from advertising, with 70% coming from North America. The company has a global presence as it provides local content in more than 20 countries internationally.
Snap has recently announced a program called Snap Star, which will provide revenue-sharing to creators in an effort to address its declining revenue and also at the same time increase user engagement.
This is a desparate move to keep up with more successful competitors such as Meta Platforms Inc. (META, Financial), TikTok and more. Thanks to better ad revenue, these competitors already compensate creators better.
The competition in the social media industry is very intense, especially in the online advertising business. On the positive side, Snap offers several creative ad formats such as AR lens experience, commercials, story ads, collection ads, dynamic product ads and a variety of tools that can help businesses generate unique ads.
The revenue growth has slowed down over the past 12 months
Another problem I see is that Snap's revenue growth is on the decline. On June 29, Snap announced that SnapChat+, its subscription product that includes premium features, had 4 million subscribers. This was the first year anniversary of the program and compared negatively to the latest data back in April, when the service had around 3 million subscribers. This isn't bad per se, but it hasn't translated to sustainable revenue growth.
Looking at the revenue over the past five years, we see that in 2022, Snap had revenue growth of 11.78% to $4.6 billion, which is a steep decline compared to the 64.25% sales growth to $4.12 billion in 2021.
The declining revenue growth is also evident in the quarter that ended on March 31, 2023, when Snap reported a steep decline of 23.94% in sales to $988.61 million, compared to revenue of $1.3 billion for the quarter that ended on December 31, 2022.
Does Snap create long-term value creation?
It should be mentioned that Snap invests in the future of Augmented Reality, offering services like Lens Studio, Spectacles and Lens Cloud that provide digital experiences. The company also has the AREs Shopping Suite, which helps merchants use augmented reality to improve shopping experiences and increase conversions.
Unfortunately, all these innovative features cost money and have a part to play in the company's lack of value creation for shareholders.
On its Investor Presentation in April 2023, the company showed a few trends supporting the idea it creates value for its shareholders. Among these trends were the average daily active users that increased to 375 million for the fourth quarter of 2022 compared to 319 million for the fourth quarter of 2021 and an adjusted gross margin that increased to 62% for 2022 compared to 58% for 2021. Note that these metrics do not actually correlate with value creation.
I argue that Snap now does not really produce what its shareholders should consider as a long-term value, even though its shares have gained around 42% year-to-date. The company has been unprofitable over the past five years with a net loss of $1.43 billion for 2022, much wider than the net loss of $487.96 million for 2021. Investors looking at the earnings trend over the past five years will see that there is hardly any improvement as the figures remain negative.
Snap's return on equity for the quarter that ended in March 2023 was -50.97%. This is ranked worse than 83.04% of 572 companies in the Interactive Media industry. As of 2017, the shareholders in Snap have witnessed only negative ROE. Snap's net margin for the quarter that ended in March 2023 was -33.25%. This is obviously not good, but it shows that the major problem for Snap stock now is that has too many expectations that are not justified by its poor financial performance.
On the valuation side, the GF Value of $47.06 indicates a possible value trap. While the stock is technically trading below its historical average valuation levels, those past valuations were in bubble territory and have been accompanied by declining profitability.
Thus, Snap shares remain very risky now in my opinion. To me, a company that fails to generate profits for the past five years is not considered an opportunity no matter how you slice it.
