Snap: Over 11 million reasons to like you

In a strange move, Snap, Inc. (NYSE:SNAP) fell back to multi-year lows despite reporting strong sales growth in the last quarter. The social messaging company is clearly not firing on all cylinders, but the market completely ignored the progress of the business and the promise of a booming subscription service. My investment thesis remains ultra bullish on stocks below $9.

850 million reasons

Snap announced 850 million monthly users of the platform when it reported its Q2’24 results. The social messaging platform has a scale of nearly 1 billion users, but the stock hasn’t gone anywhere since it went public in early 2017, with Snap only trading this low for one stretch in 2018.

The company reported that key DAUs rose 9% year-over-year to 432 million, for an increase of 36 million year-over-year. Even Snapchat+ grew the subscription service to 11 million subscribers for gross revenue of $44 million per month.

As discussed in previous research, the market seems more obsessed with volatile quarterly earnings growth. In the last 5 years, Snap has reported both quarters with 100% year-over-year growth and negative growth, but revenue has grown from $1.5 to nearly $5 billion now.

The figure that drives value is total revenue, whether it’s TTM or forward projections. Snap has generated fantastic growth over time, questioning why the market is so pessimistic.

CEO Evan Spiegel blamed the stock’s weakness on ad revenue growth that hasn’t matched other social media players, but that doesn’t justify the low stock price. In early August, Snap reported that Q2 revenue rose nearly 16%, while driving 14% growth at the midpoint in Q3, with the potential to rise to 16%.

Whether or not the numbers match the other social media players, Snap is still reporting strong growth, with subscription levels providing strong leverage for long-term growth. Meanwhile, however, the market is obsessed with the social messaging company struggling to generate ARPU growth.

As the chart below highlights, ARPU peaked in late 2021 when Covid growth peaked and Apple (AAPL) changed the accessibility of device IDs to advertisers. Snap has been slow to rebuild its advertising platform after losing key user information for ad targeting.

Snap produced just $2.86 in ARPU in Q2’24 per DAU. RoW ARPU of $1.02 lowers total ARPU with huge concentration of users in India.

As with other social media players, Snap appears to have bottomed out in 2023 and is now making progress in growing ARPU by region. The main point of view on the chart is North America, where the threshold in this cycle was Q1’23 right when Snapchat+ launched and the company started collecting around $12 per sub every quarter.

As the third quarter draws to a close, investors need to realize that Snapchat+ probably has as many as 13 million subscribers now. The company announced 11 million at the end of the second quarter, generating $44 million in gross monthly fees and more than $500 million in annual fees.

The company officially reported that non-advertising revenue grew 151% over last year to $105 million. Most of this revenue is due to Snapchat+ subscriptions.

Snap forecast ends 2024 with 14 million subscribers, generating nearly $700 million in recurring subscription fees. Investors seem to be missing the upside here. If Snap were to increase the monthly fee to $5 and reach 25 million subscribers by the end of 2025, monthly subscription fees would reach $125 million for $1.5 billion in annual revenue.

Essentially, the stock has a market cap of just under $15 billion now and trades at just 10 times its reasonable subscription revenue target for the 2025 exit. The market disconnect is already wild, given that Snap already has a business of advertising set to generate nearly $5 billion in revenue. this year.

Market disconnection

Snap hasn’t produced the most impressive results, but the market has completely lost touch with reality. Meta platforms (META) and Pinterest ( PINS ) both grew Q2 sales by just over 20% last quarter, compared to Snap’s 16% increase.

The charts above would seem to suggest a massive difference in growth prospects for different social media companies. Meta trades at targets of almost 9x EV/S, while Snap trades at targets of only 3x, despite the small delta of growth rates. Snap needs to double the price multiple to trade at just the same multiples as Pinterest and Reddit (RDDT).

Snap continues to struggle with the advertising business, but the investment story is tied to the subscription business. The company entered 2024 trading at a similar multiple to its other social media peers, and the business hasn’t changed all that much for this huge disconnect.

Take away

The main takeaway from investors is that Snap investors need to focus on the promise of the subscription business without being distracted by volatile ad revenue alone. Stock is too cheap at only 3x forward EV/S targets.