Snap: Ugly Duckling In Social Media

Summary

• Following very weak results, I believe Snap has moved decisively into the "social media loser" column.
• My original 2020 DAU, ARPU and op margin milestones seem all but unattainable.
• I continue to avoid the volatile SNAP, and remain much more optimistic about FB and TWTR over its younger cousin.

The divide between winners and losers in the social media space has deepened. At least this is my opinion after having reviewed Snap (NYSE:SNAP) 1Q18 earnings released on Tuesday, following the closing bell.

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Let me first set the stage with a brief review of the results.

Revenues of $230.7 million lagged consensus by an embarrassing $13 million - the second worst miss in Snap's short history as a public entity. In the case of a fast-growing company in the very early stages of its life, operational metrics tend to matter more to many investors than financial performance. But even on this end, DAU (daily active users) reached only 191 million in 1Q18, representing the smallest sequential growth rate as far back as I can trace. Adjusted loss per share of $0.17 met consensus, while GAAP net loss that includes share-based compensation reached a sizable $385.8 million.

Back in early 2017, I argued that Snap could produce the results necessary to support its stock price (of $23/share back then) in the long term if the company reached a series of usage, monetization and margin milestones. More specifically, I projected DAU growth of 5% sequentially each quarter through the end of 2020 and ARPU of $3.00 as a baseline set of assumptions for any plausible, bullish investment thesis on SNAP to hold water.

But as the charts below illustrate, both metrics seem to have failed to move in the right direction, leaving little hope to shareholders that the original bar that I had set for the company can be achieved within the next couple of years.

Source: DM Martins Research, using data from company reports

Last quarter, I asked myself whether Snap's efforts to improve user experience - crucial for the long-term viability of the platform - had started to bear fruit, following strong results. But it seems like my own warning that "one quarter does not make a trend" jinxed Snap's momentum. I'm a bit more convinced today that Snap's struggles may not have been left behind, and that the strength in 4Q17 could have been a fluke in a series of otherwise weak quarters.

I'm keeping my distance from the stock

In my view, SNAP is a highly speculative play in the social media space that would only make any sense to me in homeopathic doses, if at all, to limit the downside risk to my overall portfolio. In terms of upside potential, I would need to believe that SNAP will double in value within the next 12-24 months in order to accept the meaningful downside exposure. But for the share price to reach the low $20s once again in the foreseeable future, my milestones described above (DAU and ARPU, in addition to op margins of 30%) would need to be reached, which I currently find highly unlikely.

Looking at the bigger picture, I don't trust that Snap has the same real-time news appeal that has turned peer Twitter (TWTR) into a likely "thriver" in the social media space. And at the core, I believe that Snap was born prematurely as a publicly traded company (i.e. too deep in the red and not yet ready for market scrutiny) and with the "wrong DNA" (i.e. management's "larger is not better" attitude suggesting failure to understand that scale is crucial for the success of the platform and the company).

Source: DM Martins Research, data from company reports and Yahoo Finance

When it comes to investing in social media, I continue to think that simple does the trick: Facebook (FB) is currently the undisputed leader and, despite recent concerns over user data mishandling, will likely come out the big winner in the space. The table above compares a few of FB's and SNAP's key metrics, and the appeal of the former over the latter seems pretty obvious to me.

For now, I continue to avoid the volatile SNAP, and remain much more optimistic about FB and TWTR over its younger cousin.

Analyst’s Disclosure: I am/we are long FB. 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.