We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

Skip to main content
  • Register
  • Help
  • Contact us

Snap - free cash positive for the first time

Nicholas Hyett, Equity Analyst | 23 April 2021 | A A A
Snap - free cash positive for the first time

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Snap Inc USD0.00001 A

Sell: 47.64 | Buy: 47.66 | Change -1.24 (-2.54%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Snap reported first quarter revenues of $769.6m, up 66% year-on-year. That reflects a 22% increase in Daily Active Users (DAU) (to 280m) and 36% increase in average revenue per user to $2.74.

However, rising operating costs, particularly in Content, meant the group reported a 6% increase in operating losses, reaching $303.6m. Free cash flow (which excludes $237.1m of share based compensation among other things) turned positive for the first time since listing, coming in at $126.0m.

Snap shares rose 5% in after-hours 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 filters 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 - 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 $2.74 compared to Facebook's $10.14 (Q4) 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 may be edging towards positive free cash flow, but that doesn't account for 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 sales ratio well above rival social media groups mean we remain wary of Snap.

Snap key facts

  • Price/Sales ratio: 19.4
  • Average Price/Sales ratio since listing: 12.3
  • 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.

Register for updates on Snap

First Quarter Results

The first quarter saw Snap delivering its highest revenue and DAU growth in over three years. User numbers rose across all three of the group's major geographic segments, North America, Europe and Rest of World, with the majority of users on Android for the first time.

Innovations launched during the year include the group's first local market Snap Original content in India and the launch of the Spotlight platform in new markets. Commercial partners during the period ranged from Gucci to American Eagle.

Total costs rose 43% to $1.1bn, largely driven by a 280% increase in Content & Developer Partner Costs which reached $179m. Research & Development expenses also increased 46.1% to $348.6m.

Significant stock based compensation expenses, up 37.8% year-on-year, meant the group performed better on a cash basis. The group finished the period with net cash of $311.5m, having spent $108.9m on acquisitions during the year including sizing technology group Fit Analytics.

Second quarter revenues are expected to come in between $820m and $840m, although underlying cash profits are forecast to remain negative at between $20m and $0.

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.