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Snap - users and revenues jump, paring losses

Nicholas Hyett, Equity Analyst | 23 July 2021 | A A A
Snap - users and revenues jump, paring losses

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Snap Inc USD0.00001 A

Sell: 47.64 | Buy: 47.66 | Change -1.24 (-2.54%)
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Snap saw second quarter Daily Active Users (DAUs) rise 23% year-on-year. Together with a 76% increase in Average Revenue Per User (ARPU) that saw revenue more than double to $982m, as the group lapped weaker comparators due the pandemic and benefited from increased investment in sales teams.

The group reported a loss after tax of $151.7m, down from a $326.0m loss a year ago.

The shares rose 17.7% in after market trading.

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Our view

Snapchat's user growth has continued its recent rapid growth, while increased sales investment has boosted ARPU. 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.

While Snap's net loss remains substantial, operating costs as a proportion of revenue have started to fall. Investors should remember that we're still experiencing pretty exceptional times around much of the world - and whether the group can sustain its revenue growth as 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 ARPU languishes at $3.35 compared to Facebook's $9.27 (Q1) lends weight to the argument - a nearly three-fold increase in revenues on the same cost base would do wonders for profits.

However, we worry about whether that all-important growth is 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 other shareholders by spreading any future returns more thinly. 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.

Overall 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: 19.8
  • Average Price/Sales ratio since listing: 12.8
  • 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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Half Year Results

North America remains by far the group's most important region, with revenue of $702m and year-on-year growth of 129%. By comparison Europe contributed revenue of $152m, up 94% year-on-year, while the Rest of World saw sales rise 86% to $128m. That reflects a considerably higher ARPU - averaging $7.37 in North America compared to $3.35 globally.

Total operating costs rose 53.6% to $1.2bn. That reflects increased marketing spend, a 31% increase in headcount and the return of travel and event expenses suspended during the pandemic. Stock based compensation in the quarter rose 37.8% year-on-year to $256.6m.

Despite higher levels of revenue and profit, free cash flow remained negative, with an outflow of $116m compared to an $82m outflow in the same quarter last year. That reflects increased working capital, with payables falling and receivables rising.

The group finished the quarter with net cash of $916.5m, up from $862.4m at the start of the year - largely thanks to positive free cash flow generated in the first quarter, as well as $7.7m received from the exercise of stock options.

Snap expects third quarter revenue to grow between 58 and 60% year-on-year, to between $1.07bn and $1.09bn. Underlying cash profits are expected to be between $100m and $120m, compared to $117.4m achieved in the current quarter.

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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.