Snap (SNAP, Financial), the once $24 billion and now $13.96 billion California-based camera company, faltered (-)14.09% days after announcing its second-quarter results.
In the first half, the parent company of Snapchat doubled its revenue to $331.3 million while, in contrast, it recorded an incredible $2.65 billion in losses – eight times its business revenue generation for the period.
In review, Snap recorded much higher expenses in relation to its research and development (16.5 times), general and administrative (23 times) and sales and marketing expenses (7.9 times). These three operating expenses totaled $2.68 billion.
In comparison, the endeavoring $11.9 billion Twitter (TWTR, Financial) spent $767.5 million in the same period while tech stalwart $492.6 billion Facebook (FB, Financial) had spent an equivalent $7.23 billion.
The $2.68 billion related expenses in the first six months also far exceeded what Snap has had in previous fiscal years 2015 at $258.05 million and 2016 at $473.2 million.
Valuations
Snap has recorded losses in recent quarters leading to no trailing price-earnings (P/E) multiple and lack of trailing 12-month sales figure made it impossible to derive a price-sales (P/S) multiple as well.
The company had a price-book (P/B) ratio of 9.09 times vs. the industry median of 3.4 times. Average fiscal year 2017 revenue estimates indicated a forward multiple of 15.2 times.
Total returns
Since its IPO in March, Snap’s share price has dropped (-)56.33%.
(Prospectus)
Snap
Snap was formed in 2010 as Future Freshman LLC, a California limited liability company, and changed its name to Toyopa Group LLC in 2011. In 2012, the company incorporated as Snapchat Inc. and changed its name to Snap Inc. in 2016.
In March, Snap was able to raise $3.4 billion of which an estimated $2.3 billion, now officially $2.6 billion (as of first half), was kept for the company. The remaining $750 million was split among the company’s co-founders Evan Spiegel and Bobby Murphy, venture capital firms Benchmark and Lightspeed and newly installed Snap Chairman Michael Lynton as a result of selling their stock ownerships.
According to its prospectus, the principal purposes of Snap’s IPO were to increase its capitalization and financial flexibility and create a public market for our Class A common stock.
Snap intended to use the net proceeds it raised for general corporate purposes, including working capital, operating expenses and capital expenditures. The company may also use a portion of the net proceeds to acquire complementary businesses, products, services or technologies.
Further, Snap may also use a portion of the net proceeds to satisfy tax withholding obligations related to the vesting of restricted stock units.
Snap described itself as a camera company.
According to filings, the company believes that reinventing the camera represents its greatest opportunity to improve the way that people live and communicate.
In the way that the flashing cursor became the starting point for most products on desktop computers, Snap believes that the camera screen will be the starting point for most products on smartphones.
Snap’s flagship product, Snapchat, is a camera application that was created to help people communicate through short videos and images. Snap calls each of those short videos or images a Snap. Snap has several products including Camera, Chat Service, Storytelling Platform, Memories, Publisher Tools, Spectacles (1).
Snap generates revenue primarily through advertising.
Ownership
According to its prospectus released in February, Snap has three classes of shares A, B and C.
Co-founders Evan Spiegel and Robert Murphy owned 43.6% Class A, 4% Class B and 100% Class C correspondingly resulting in a total voting power of 88.6% jointly.
As of its recent quarter filings, Class A has 811.1 million, Class B has 170.2 million, and Class C has 215.9 million shares outstanding.
Company metrics
Daily Active Users
Snap defines a Daily Active User as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period.
In the second quarter, Snap’s daily active user grew 21% year over year to 173 million.
GROSS* comparison
Facebook’s DAU rose 17% year over year to 1.32 billion in the second quarter while Twitter’s DAU increased 12%.
*Gross because exact DAU description varies per each social media or camera company.
Average Revenue per User
In the second quarter, ARPU rose 109% to $1.05.
GROSS comparison
ARPU for Facebook in the second quarter rose 24% to $4.73 while Twitter did not provide any ARPU figures.
Hosting costs per DAU
Hosting costs is part of Snap’s cost of revenue and primarily includes expenses related to bandwidth, computing, and storage costs.
Hosting costs per DAU were 61 cents in the second quarter compared to 55 cents in second-quarter 2016 – a 10.9% increase.
Cash, debt and book value
As of June, Snap had $501.7 million in cash and cash equivalents and no debt. Of its $3.88 billion assets 16.5%Ă‚ were identified as goodwill and intangible while book value rose by 133% year over year to $3.54 billion.
Cash flow
In the first half, Snap had (-)$364.57 million in cash outflow from operations compared with (-)$226.7 million in the year prior. In addition to significant losses, the company had more outflows in relation to its deferred income taxes, prepaid expenses and other current assets, and other assets.
Capital expenditures including purchase of intangible assets were $45.1 million leaving Snap with (-)$409.6 million in free cash outflow compared to (-)$29.4 million in the year prior.
Despite the outflows, Snap repurchased $208.4 million worth of stock from employees for tax withholdings while having raised $2.65 billion in its proceeds from Class A issuance (IPO).
Conclusion
Snap’s first-half results did indicate strong business growth in comparison to its two other possibly nearest competitors Facebook (46.8% revenue growth) and Twitter (-)6.2%. In addition, the company allocated significant amounts ($3 billion) in expenses for the sake of business expansion. This commitment did reflect in stronger active user gains and ARPU gains in comparison to the stalwarts.
Nonetheless, analysts expect Snap to deliver losses in this fiscal year ending in December on revenues a little more than $900 on average. These analysts also still expect Snap to deliver losses by fiscal-year 2018.
Snap continues to carry a zero debt balance sheet while adjusting its payouts to its previous shareholders or as observed.
Analysts have a hold recommendation with a $16.32 per share average target price vs. $11.8 at the time of writing. Using $900 million revenue figure multiplied by industry median P/S multiple of 2.7 times indicated a valuation of $2.43 billion or a per-share figure of $2.06.
Unless Snap can deliver revenue of at least $5 billion to justify its current valuation, I would not recommend buying its shares.
Snap is a pass.
Notes
- Company filings
Camera
Snapchat opens directly into the Camera, making it easy to create a Snap and send it to friends. Snaps are deleted by default so there is a lot less pressure to look pretty or perfect when creating and sending images on Snapchat. We offer lots of fun Creative Tools like Lenses, Geofilters and Bitmojis that allow our community to express themselves through Snaps. Lenses are interactive animations that are overlaid on a person’s face or the world around them. Geofilters are artistic filters that can be applied after a Snap is taken at pre-defined times and locations. Bitmojis are cartoon likenesses of a user that are created in the Bitmoji application. On average, more than 60% of our Daily Active Users create Snaps with our Camera every day. This means that our Chat Service and Storytelling Platform products are always full of new, unique and expressive Snaps.
Chat Service
The first version of our application was a Chat Service that made it easy to send Snaps back and forth with friends –Â hence the name “Snapchat.” Our Chat Service has since been reimagined to include text-based Chat, video and voice calling, stickers, Bitmojis and Group Chat. On average, more than 60% of our Daily Active Users use our Chat Service every day to send Snaps and talk with friends. We benefit from the frequency with which our user base communicates with one another because each message invites a user back to the application when they receive a push notification. On average, our Daily Active Users visit Snapchat more than 18 times each day.
Storytelling Platform
Stories are collections of Snaps that play in chronological order and are deleted within 24 hours. Different types of Stories are told from different perspectives. We started with My Story for each individual user, expanded to community Live Stories, and then introduced Publisher Stories created by our experienced publisher partners. On average, over 25% of our Daily Active Users post to their Story every day. Our Storytelling Platform provides a unique variety of personal and professional content for our community to enjoy. Our community spends an average of 25 to 30 minutes on Snapchat every day.
Memories
We introduced Memories to give each user the option of saving their Snaps in a personal collection. Users can send Snaps from Memories to friends and create new Stories from saved Snaps. We also developed our own search and privacy tools to help users find the Snaps they are looking for and store them securely.
Publisher Tools
We offer a growing suite of content tools for partners to build, edit, and publish Snaps and attachments based on unique editorial content. These Publisher Tools give our publishers and advertisers creative opportunities to engage with our community every day.
Spectacles
Our latest effort to reinvent the camera is Spectacles, our sunglasses that make Snaps. Spectacles connect seamlessly with Snapchat and are the best way to make Memories because they capture video from a human perspective.
Disclosure: I do not have shares in any of the companies mentioned.
