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Snap - revenues and users in line, profits less positive

Nicholas Hyett, Equity Analyst | 22 July 2020 | A A A
Snap - revenues and users in line, profits less positive

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Snap Inc USD0.00001 A

Sell: 50.29 | Buy: 50.30 | Change 1.28 (2.61%)
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Snap reported year-on-year revenue growth of 17% in the second quarter reaching $454m, a little ahead of analyst expectations.

However, despite the significant revenue growth, net income fell to a $326m loss this quarter. That compares with a $255m loss this time last year. The decline reflects higher operating costs, increased research & development spend and higher interest expenses.

Given ongoing uncertainty around coronavirus the group is not providing guidance for the coming quarter.

Snap shares fell 6.4% in aftermarket trading.

View the latest Snap share price and how to deal

Our view

A millennial audience confined to its sofa has continued to turn to Snapchat to talk to friends. And while overall DAU growth is broadly in line with recent trends, a more engaged audience that spends more time on the app is more attractive to the all-important advertising buyers that ultimately drive Snap's revenues.

Progress is testament to the ongoing investment in the platform. Proprietary video content and augmented reality goodies are improving the experience for users. Crucially Snap continues to invest in the backend tools that allow marketing teams to target and assess the effectiveness of their advertising dollars.

However, while the top-line continues its steady onward march - and there have been times where that looked like a significant challenge in itself - the bottom-line is heading backwards. Net income is down year-on-year, and even if you ignore the eye-watering stock-based compensation packages profit doesn't make it into the black.

Snap bulls will no doubt argue that, like Netflix, the group needs to invest in content and technology now to underpin a rapid move to profitability once it achieves the necessary scale. A sizeable cash pile gives it the firepower to do that, and it's a model that has worked nicely for Facebook over the years. The fact Snap's average revenue per user (ARPU) languishes at $1.91 compared to Facebook's $6.95 lends credence to the argument - a near threefold increase in revenues on the same cost base would do wonders for profits.

However, we worry about the group's ability to deliver that kind of growth, especially in a sector where advertisers are spoiled for choice and the likes of Facebook, Twitter and TikTok are also after a slice of the pie. With a price to sales ratio well above rival social media groups we remain cautious.

Snap key facts

  • Price/Sales ratio: 16.0
  • Average Price/sales ratio since listing: 13.9
  • Prospective yield: 0%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results

The group also grew Daily Active Users by 17% to 238m, in line with what the market had hoped for. That reflects growth in all regions, but there were particularly strong results outside the US and Europe, as well as growth across both Apple and Android products. Average revenue per user was flat year on year at $1.91.

The group has continued to invest in new content, including agreements with Disney, ESPN, the NBA and the NFL. The number of users watching Snapchat shows increased by over 45% year-on-year. The group has also launched various new Augmented Reality (AR) lenses, with 180m users having engaged with AR daily during the quarter.

Increased support for advertising teams and developers during the period include new tools for targeting and analysing ads and simpler lens development tools.

Adjusted cash profits, which excludes debt costs and share based remuneration payments, declined to a $96m loss from $79m this time last year - better than analysts had expected.

Free cash flow in the quarter remained negative at -$82.3m, an improvement from -$103.4m in Q2 2019. The group held $1.2bn of net cash at the end of the period, broadly similar to the position at the start of the year.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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