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About Snap
TD Ameritrade’s platform says that Snap is a camera company.
We think that is accurate for the most part.
However, the way the founding team at MacroHint sees Snap is as the de facto holding company in charge of one of the most well used social media applications in the world, Snapchat.
For those who are unfamiliar with Snapchat, first of all, congratulations and please don’t download the app, as you will waste precious hours of your life on the platform (come on, it’s just our opinion based on our previous experience with Snapchat).
Secondly and more pertinent to this stock analysis article, Snapchat is a mobile social media app that lets users make stories (composed of photos or videos), send pictures or videos to their connections or close friends and also allows users to track where their friends are through the app.
And, of course, one can’t forget about the filters.
One can probably devise why this app is so addictive, especially for the company’s younger target audiences, from middle schoolers with phones all the way up to high schoolers and college students.
So, that’s Snap and Snapchat in a nutshell.
However, as has been seen more and more in recent history, interesting and engaging certainly doesn’t automatically equate to oozing revenue, or an easy path to revenue in the first place.
This then begs the question of how Snap ultimately makes its money.
The company scrapes up nearly all of its revenue through advertisements run on its platform, as is the case with many other major social media companies and platforms such as Meta Platforms, Twitter and others.
One of the differences between these companies, however, is the fact that they have other streams of revenue that they’re able to draw from, which is more of a positive than a negative as we have seen during this current economic down cycle.
For instance, Meta is venturing into virtual reality space among others, Twitter sells blue checkmarks in addition to maintaining other revenue streams whereas Snapchat is reliant upon approximately 95% of its revenue from the United States deriving from ad sales.
Not very diversified.
With Snap’s stock (NYSE: SNAP) down almost 64% this past year’s span of time, let’s see if opportunity is knocking at the door with this company and its stock.
Snap’s stock financials
Trading at a comparably modest $11.56 per share, Snap has a market capitalization of $18.28 billion along with no readily available price-to-earnings (P/E) ratio nor annually distributed dividend.
Most of this is typical in that many technology companies, well established or brand new do not have earnings readily available to dish out or aren’t yet profitable on a net basis and the former appears to be the case with Snap, fortunately, from our vantage point.
It appears as though Snap’s executive team has opted to retain any earnings in order to further expand the company and its technological capabilities, which to us, is a great thing and we salute Snap for doing so, of course, if that is in fact what it’s doing, although it does appear to be the case.
This is also probably one of the main reasons the company doesn’t currently offer its shareholders an annual dividend, which we have no issues with, especially at this stage of the economic cycle.
Snap, like many other technology companies (and companies in other industries for that matter), needs to keep as much cash on deck as it can right now.
Let’s get a little more familiar with the company and its finances.
For instance, according to Snap’s balance sheet, the company’s executive team is tasked with managing around $7.5 billion in terms of total assets along with nearly $3.7 billion in total liabilities.
All things considered, we’re perfectly fine with the present condition of Snap’s balance sheet as we continue rolling deeper and deeper into the current recession, as its total assets trump the amount of its total liabilities by a fair amount, enough to help us sleep well at night if we were invested in the company’s shares.
Strolling over to the company’s income statement, Snap’s ability to generate revenue over the last five years hasn’t been bad by any stretch. In fact, it has remained resilient through thick and through thin.
For example, the company’s total revenue was pegged at $825 million in 2017 and has risen each year thereafter to its latest reported figure of $4.1 billion (2021).
This is great growth.
As Snap’s flagship entity, Snapchat, continues gaining more and more traction within the ever so brutally competitive social media space, as many social media apps were considered cool by the masses for a year or two and then another one came along, knocked it off and happily ate its lunch in the process, revenues will likely continue trending upwards, however, that is not what we’re most concerned about at the moment.
Cash flow is what we’re concerned about as it specifically relates to this company.
Now would be an opportune time to venture on and move onto the company’s cash flow statement.
Incidentally, this company is used to losing loads and loads of cash, as it reported a resoundingly negative net income of -$3.4 billion in 2017, however, to Snap’s credit its negative net income, although remaining negative each year over the last five years, is trending closer and closer to breaking even and subsequently, becoming positive.
As a reference, Snap’s net income figure in 2020 was reported as -$945 million and as -$488 million in one of its most recent reports, in 2021.
Don’t get us wrong, Snap’s net income loss, which can likely be attributed to a mixture of heightening expenses, a strong United States dollar (USD) and inherent capital investments required to stay ahead of the technology and user interface curve, is still substantial, however, given the relative strength of its balance sheet, we think this is a hurdle Snap can overcome within the next decade.
Yes, that may seem like a long stretch of time, however, it can also be seen on the company’s cash flow statement that it recently achieved positive total cash from operations (reported in 2021) of $293 million.
To us, this is a great achievement and hopefully a signal that this is only the beginning and not the finale of Snap digging out cash from its operations and additionally, inching incrementally closer to net positive cash flow.
Snap’s stock fundamentals
All of that being said, net profitability on an annual basis is far from being Snap’s strong suit.
Namely, the company’s trailing twelve month (TTM) net profit margin currently sits at -24.32% to the industry’s average of 20%, according to TD Ameritrade’s platform.
Net profitability will take some time and that is slightly alarming to us, however, its par for the course with Snap’s current business model, at least, from our perspective.
Therefore, although we’re not terribly concerned with the company’s present TTM net profit margin, we don’t typically enjoy considering locking up our investable capital in companies that have been around for a while yet are still notably far from being net profitable on an annualized basis.
To each his or her own, nevertheless.
Unexpectedly, the company’s TTM returns on assets and investment are also far below that of the industry’s average, standing strikingly negative to industry’s average of markedly positive.
In terms of improvement, this is likely to take Snap a while as well given the aforementioned reasons.
Should you buy Snap stock?
One of our biggest gripes we have with Snap (NYSE: SNAP) is that nearly all of its revenue comes from essentially one brutally cyclical source; advertising.
Also, as alluded to before in this stock analysis article, long-term engagement and product retention is very, very difficult in the social media sphere.
One day, if one of Snap’s primary competitors (think Instagram, Facebook, BeReal etc..) wants to dip its beak further into Snapchat’s market and its capabilities and inevitably extract its market share in those segments, it wouldn’t be that difficult.
Additionally, social media platforms, for the most part, tend to be very trendy in the sense that they gain substantial amounts of popularity and then most end up like Myspace.
Although there are a host of potential pros and cons to note in pondering an investment in Snap’s stock, it is our personal belief that sitting on the sidelines and researching other companies within the sector with more diversified revenue streams wouldn’t be a bad idea.
We give the company’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.