Snap Was A One-Quarter Wonder

Summary

• Company badly misses revenue estimates.
• Adjusted EBITDA and free cash flow worsen.
• User base not really growing.

After the bell on Tuesday, shares of camera company Snap (NYSE:SNAP) plunged more than $2 a share, putting their all-time lows in play, after the company reported its first quarter earnings. For those that thought the name was back in business after the stock soared just a few months ago at the Q4 report, the situation obviously has not gotten any better.

Revenues for the period came in at $230.7 million, missing Street estimates by nearly $13 million. While this did represent 54% growth over the prior year period, the Street was expecting much more after Q4's large beat. Part of the miss was likely driven by a miss on daily active user growth. Snap reported DAUs of 191 million, falling short of expectations by about 3 million. This represents just 2% growth sequentially.

Unfortunately, the revenue miss wasn't even the worst part of the report. The company reported an adjusted EBITDA loss of $218 million, which was an increase of 16% over the prior year period, and the worst quarterly reported number since the name went public. It's also down considerably from the $158 million loss reported in Q4, as seen in the chart below.

(Source: Snap earnings slides)

One of my biggest concerns with Snap has been the company's cash situation. Part of the reason for going public was that high cash burn required a capital infusion, and we're likely to see another raise coming in the next year or two. For Q1 2018, the company reported negative free cash flow of $268 million, nearly $100 million worse than the prior year period. This was also the worst free cash flow quarter since going public by nearly $40 million. While the company still had over $1.8 billion in cash at quarter's end, it cannot continue to burn through money like this indefinitely.

Snap just doesn't operate a viable business in my opinion. The company had an operating loss of $392.5 million in the period, which means they lost $1.70 for every dollar of revenue generated. Management doesn't see profits coming anytime soon, which isn't the end of the world, but the problem here is a lack of improvement. Even on a non-GAAP basis, the company's net loss jumped by nearly $30 million over the prior year period, more than 15.4%.

The other major problem here is valuation. Even with a 15% fall in the after-hours session, Snap goes for more than 11.3 times projected 2018 revenues. Why should investors pay that when Twitter (TWTR) goes for a little more than 8 times and Facebook (FB) goes for about 9 times? Both Twitter and Facebook are actually profitable and produce solid cash flow, allowing for more investments in their future. Facebook is also buying back shares, while Snap is heavily diluting investors by the quarter. Snap's weighted average diluted share count was 1.27 billion for Q1 2018, compared to 955 million a year earlier.

As you can see in the chart below, shares of Snap are plunging in the after-hours session. Now below $12 again, they are just 50 cents from their public trading lows. At times last year I was discussing the possibility of shares going to the single digits, and I'm sure we'll see some analyst comments in the coming days that echo that notion.

(Source: cnbc.com)

In the end, investors might want to bail on Snap while they still can. The company announced another big revenue miss, showing that Q4 2017's progress was likely a one-time event. With the company reporting its worst adjusted EBITDA and negative free cash flow numbers since going public, shares are tumbling and could see new lows shortly.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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