Summary
- Despite beating its Q1 forecast and making $462.5 million in revenue for the first three months of FY20, Snap is overvalued at the current price.
- In the last eight years, as the market was booming, Snap was unable to find a profitable business model, as it was constantly redefining itself.
- Our analysis shows that Snap is overvalued by more than 16% and we decided to open a short position in it.
Despite beating its Q1 forecast and making $462.5 million in revenue for the first three months of FY20, Snap (SNAP) is overvalued at the current price. Once the lockdown ends, we’ll probably see a quarter-to-quarter decline of the overall users. Besides, as advertisers start to cut down their ad budgets to weather the current storm, it will be hard for Snap to make a substantial amount of money this year. We believe that the increased competition and the weak advertising market will make it harder for Snap to turn to profitability sometime soon. Our analysis shows that Snap stock is overvalued by around 40% and we decided to open a short position in it.
No Path to Profitability
We have been bearish on Snap in 2017 when the company was facing increased competition from Instagram and it was unable to offer any meaningful value for users to encourage them to stick with its platform. Nevertheless, over time the company proved us wrong, as the service picked up steam and the company managed to reinvent itself, and advertisers started to place their ads on the company’s platform. The introduction of Discover feed acted as a major catalyst for growth in recent years and now more and more users tend to stick with the feed for longer times than before. Recently, the total daily time spent on Discovery increased by 35% Y/Y, and currently, it is one of the major monetization mediums inside Snap’s platform. The continuous addition of new content will help Snap to keep its users engaged with the app. Also, the company’s AR efforts so far have been successful, as the engagement rate continues to be high. However, it’s too soon to tell how the use of AR technology will impact the company’s financial performance in the foreseeable future.
Despite all of this, we believe that Snap is not a solid long-term investment for tech investors. While the company managed to add 11 million daily users to its service in Q1, the major growth came outside of North America. The rest of the world segment added 7 million users. Unlike the North American segment, it’s harder to monetize users outside of the United States, since they have less purchasing power and the CPM is considerably lower for them. It’s good that Snap is not stagnating. However, investors should not be excessively optimistic about the recent spike in DAU’s, considering that there are companies like Pinterest (PINS) and TikTok that recently experienced a greater user base growth. In comparison to its peers, Snap is not growing as fast as other apps and as a result, it will take longer for it to become profitable.
In addition, despite increasing its revenue in Q1 by 44% Y/Y to $462.5 million, the net loss for the quarter was $306 million. For comparison, a year ago when the revenue for the same period was $320 million, the company’s net loss was $310 million. Therefore, despite dramatically increasing its revenues this year, Snap continues to lose a substantial amount of money.
Considering this, we believe that the company will continue to be unprofitable at least in the next two years. Our DCF model below clearly shows that revenues will continue to grow at impressive rates, but the overall business will lose money for some time.
