Snap (NYSE: SNAP) has developed an established track record of shareholder value destruction since its IPO in 2017. While the company has managed to grow its revenues since then, it has come at a great cost. Snap has constantly needed fresh cash to stay afloat, as profitability has yet to be achieved.
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The consequence of this persistent need has unfortunately resulted in frequent debt and share issuances, thereby eroding the company’s balance sheet and diluting the value of each shareholder’s stake. This theme was once again present in the company’s most recent results, with net losses yet to shrink. Accordingly, I am bearish on the stock.
Snap’s Revenue Growth is Declining
Snap finds itself caught in a puzzling dilemma, a combination of factors that present a significant challenge. This situation can be summed up as a slowdown in revenue growth coupled with increasing costs, leaving Snap in a difficult position where achieving consistent profits seems out of reach.
To provide a backdrop, Snap burst onto the scene with great fanfare when it made its debut on the public market in 2017, carrying the promise of exponential growth. However, the company’s once-robust momentum has since experienced a swift decline. Notably, its revenue growth figures for 2016, 2017, and 2018 stood at an impressive 589.5%, 103.6%, and 43.1%, respectively.
Although there was a partial resurgence in 2020 and 2021, fueled by heightened user activity during the pandemic, Snap’s revenue growth trajectory has returned toward its previously worsening trend. Not only did revenue growth come in at a disappointing 11.8% last year, but also, in its most recent first-quarter results for 2023, revenues actually declined by 7% to $988.6 million. This was the first year-over-year revenue decline in the company’s history. In my view, it should raise elevated concerns regarding whether the company’s overall growth story is even valid at this point.
What’s even more disturbing in Snap’s investment case is that while its revenue growth prospects have been shrinking over time, its costs have been on the rise. Total operating expenses over the past 12 months have amounted to $5.83 billion. This compares to just $2.43 billion for the equivalent period in 2019. Hence, the company has not been able to shrink its losses, even as revenues did grow during the period. In its most recent results, the company’s operating expenses once again grew, this time by about 1.5% to $1.35 billion, leading to another quarter of steep net losses, which amounted to $328.7 million or $0.21 per share.
Snap’s Lack of Cash to Present Further Difficulties
With another quarter sustaining Snap’s ever-present theme of being in need of cash, SNAP shareholders face further difficulties ahead. The fact that Snap currently has just $1.58 billion of cash and equivalents means that the company can stay afloat for barely a year at its current burn rate.
All-around, share and debt issuances are almost certainly going to take place sooner than later. In fact, this is constantly taking place in a sense through Snap’s stock-based compensation, which has been the most prominent source of financing for the company. For instance, even though the company reported a loss of $328.7 million in Q1, its cash and equivalents actually grew from $1.42 billion in the previous quarter due to the company recording $314.9 million in stock-based compensation (a non-cash item).
Higher stock-based compensation (it was $275.4 million in the prior-year period) continues to be a significant factor of shareholder value erosion due to the constant dilution that’s going on. For context, Snap’s share count has expanded by roughly 38% since its IPO, with shareholders losing a piece of their pie gradually over time following Snap’s diluting financing strategy.
When it comes to debt, the situation doesn’t look good either. Snap has gone from being a debt-free company during its IPO to burdening its balance sheet with $4.16 billion in total debt. This is a terrible development, especially with rising rates, that will further elevate Snap’s interest expenses and deter the company from making a profit.
Is SNAP Stock a Buy?
Wall Street seems to have mixed feelings about Snap which has a Hold consensus rating based on five Buys, 18 Holds, and one Sell assigned in the past three months. At $10.03 per share, the average Snap stock forecast suggests over 5% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SNAP stock, the most profitable analyst covering the stock (on a one-year timeframe) is Ross Sandler from Barclays, with an average return of 47.96% per rating and a 56% success rate.
Takeaway: Snap Relies Heavily on Debt and Equity Financing
In conclusion, Snap’s performance since its IPO has been marked by a consistent pattern of value destruction for shareholders. Despite revenue growth in recent years, the company has struggled to achieve profitability and has relied on frequent debt and share issuances to sustain its operations.
The latest financial results show a concerning trend of declining revenue growth and increasing costs, raising doubts about the company’s overall prospects. With limited cash reserves and a growing debt burden, Snap faces significant challenges ahead. Consequently, shareholders should continue experiencing dilution of their stake over time. Hence, I remain bearish on the stock.
