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Snap - more losses despite user and revenue growth

Nicholas Hyett, Equity Analyst | 5 February 2021 | A A A
Snap - more losses despite user and revenue growth

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Snap Inc USD0.00001 A

Sell: 10.17 | Buy: 10.18 | Change -0.07 (-0.68%)
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Snap reported revenues of $2.5bn in 2020, up 46% year-on-year. That reflects strong growth in both daily active users and average revenue per user.

However, increased operating expenses and significantly higher interest expense on a higher level of debt meant the group reported a loss after tax of $944.8m, down just 8.6% from $1.0bn a year ago. The group reported positive full year cash profits (EBITDA) for the first time, coming in at $45.2m.

Snap shares fell 7.6% in aftermarket trading.

View the latest Snap share price and how to deal

Our view

A millennial audience confined to its sofa has been a major boost for Snapchat. Daily active user growth has kicked up a gear, and so has average revenue per user. The larger and more engaged the audience that spends more time on the app, the 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's also investing in the backend tools that allow marketing teams to target and assess the effectiveness of their advertising dollars.

The group has also made some progress on profitability. While Snap's net loss remains substantial, costs as a proportion of revenue have started to fall. Investors should remember that these are exceptional times - and whether the group can sustain its revenue growth when conditions return to normal remains to be seen.

The path to profitability requires investment in technology and content now - driving user and revenue growth that would ultimately create huge economies of scale and more than cover current losses. A sizeable cash pile gives it the firepower to invest, 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 $3.44 compared to Facebook's $10.14 (Q2) lends credence to the argument - a two-and-half-fold increase in revenues on the same cost base would do wonders for profits.

However, we worry about whether that all-important growth is really achievable. Teenagers are a fickle audience - with an ever present risk they vanish off to the next big thing. Even in the current market advertisers are spoiled for choice when it comes to social media platforms, and the likes of Facebook, Twitter and TikTok are formidable opponents.

Costs are also a problem. The group's burning through hundreds of millions of dollars of cash every year - and that's' before taking into account eye wateringly high share awards to employees.

Stock options may be costless in cash terms, but they have a real effect on shareholders and risk giving away what upside there is to employees. Add to that the fact ordinary shareholders have no-voting rights and CEO Evan Spiegel controls a majority of voting shares and governance is potentially a real concern.

Recent trends have been encouraging. But competition, cost and governance concerns, together with a price to earnings ratio well above rival social media groups mean we remain wary of Snap.

Snap key facts

  • Price/Earnings ratio: 216.7
  • Average Price/Earnings ratio since listing: 198.6
  • Prospective dividend yield (next 12 months) yield: 0.0%

All ratios are sourced from Refinitiv. 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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Full Year Results

Daily Active Users (DAUs) rose 22% year-on-year to 265m, across all the group's regions and both iOS and Android Platforms. DAUs grew fastest in the 'Rest of World' region, where a 55% increase means Snap now has 99m users.

Average revenue per user (ARPU) rose from $2.58 in the final quarter of 2019 to $3.44 at the end of 2020. That was driven by rapid growth in North America (up 63%) and Europe (up 39%), although the strong user growth elsewhere meant ARPU fell 18% in Rest of World.

Operating costs rose 19.5% to $3.4bn, driven by a 24.7% increase in research & development expense and 21.1% in sales & marketing, partly offset by lower General & Administrative costs. These extra costs include a significant increase in stock based compensation - up 12.3% year-on-year to $770.2m.

During the quarter the group continued to invest in additional augmented reality lenses, while engagement with short form content increased among both Generation Z and older viewers. The group also continued to improve its options for advertisers - including adding app install as a bidding objective for sponsored Lenses.

Free cash flow in the year remained sharply negative at -$225.5m, although that's an improvement on the -$341.4m reported last year.

Net cash fell from $1.2bn a year ago to $862m at the end of 2020.

Revenue in the first quarter of 2021 is expected to be between $720m and $740m, compared to $462m in the first quarter of 2020. Cash profits are expected to be -£70, to -$50m compared to -$81m a year ago.

Find out more about Snap shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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