Snap: Snap Again (NYSE:SNAP) | Looking for Alpha
Shares of Instantaneous (NYSE: SNAP) fell sharply again as the company awaited its next big disappointment for investors. My last vision of the company, although it wasn’t really about Snap’s business, but more dilutive practices of ignoring stock-based compensation date back to July.
Snap has been the poster child for ignoring large stock-based compensation expenses in its non-GAAP reporting, but the magnitude of those expenses and their importance, in terms of worker compensation, have made that this practice seemed to me to be really unsustainable. .
The impact of equity spending
In July, I watched as Snap grew its 2021 sales dramatically, with revenue up 64% to $4.1 billion, while profit numbers diverged wildly. After all, a GAAP operating loss of $702 million was declared, but at the same time an adjusted profit of $775 million was also recorded.
A difference of more than $1.2 billion between adjusted net earnings and GAAP earnings was primarily due to a stock-based compensation charge of $1.1 billion. The magnitude of this expense is staggering at nearly 30% of sales and with over 5,600 workers, the average stock-based compensation spend totaled $200,000 per worker!
It seems fair to say that this expense is a crucial part of compensation, rather than a supplement or incentive. Therefore, these expenses are real and at some point there comes a day of reckoning, not only when investors suffer gradual dilution, but more when they realize that a business is not profitable because they are costs real.
What else is going on?
After posting spectacular growth in 2021, the company faced tough comparables that have become visible so far this year, having had dismal implications for the share price. After all, Snap seemed to be one of the most successful social media companies (even though it was still posting losses) last year. A stock of $80 at this time last year saw its second digit disappear here with stocks at $7 and change.
Revenue for the first quarter of 2022 rose 38% to $1.06 billion as GAAP operating losses fell 11%, still standing at $272 million. The company has already steered soft, with second-quarter sales up just 20-25% and EBITDA around $50 million, down from $65 million in the first quarter.
Turns out second-quarter revenue was up just 13% to $1.11 billion due to currency headwinds, competition between ad providers, but also general weakness. of the advertising market with the economic downturn. This resulted in quite disappointing net income figures with EBITDA reported at just $7 million and operating losses reported at $401 million. This shows a sharp deterioration in net income, even as sequential sales increased. The degree of uncertainty even meant that no guidance was issued for the third quarter.
Shares fell another 30% last week as third-quarter results fell far short of expectations, although no formal expectations were made by the company. A 6% increase in sales to $1.13 billion may not be so bad, with daily active users up 19% to 363 million, indicating more underlying usage trends. strong, with softer publicity that really hurts the business. Adjusted EBITDA was $73 million, with operating losses increasing to $435 million, primarily due to a restructuring charge of $155 million.
These are dismal results and the number of shares has now risen to 1.71 billion shares, giving the company an equity valuation of $13.7 billion at $8 per share. The enterprise value amounts to approximately $13 billion if we assume a convertible loan of $3.7 billion as a regular loan at these low prices. If we remove the stock-based compensation expense, the losses were $280 million, entirely due to a huge stock-based compensation expense of $343 million.
The truth is Snap is trading around 3x sales, and while revenue is still growing a bit in a very challenging environment, there are still losses which are still huge by any means, realistically exceeding more than a billion out of just over $4 billion. execution rate in terms of sales.
In addition, the short term will be difficult as no guidance has been given for the fourth quarter as the expectation is that revenue will be flat, which will likely hurt the bottom line despite restructuring efforts. The only silver lining is that daily active usernames far outpace revenue as the increase in time spent is even greater, alleviating fears that time spent on competing platforms will be hugely detrimental to the company, which just doesn’t seem to be the case.
Therefore, it continues to be a very risky position and at the same time many peers have sold, and their valuations have also been much more modest, while many of them are profitable. This makes concerns about profitability or cash burn not much of an issue for some of these names, including Meta (META) sure.
While I’m normally quite keen to go bottom fishing and see some positive engagement drivers here, the fundamentals are still too dire for me to feel comfortable buying the dip here because the fundamentals in terms of the numbers, commercial strength and its business model do it doesn’t seem to add up.