Snap Stock: Strong Value With Expected Free Cash Flow Margin Growth


Woman photographing fish and chips in a restaurant with a smartphone

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Shares of social networking company Snap Inc. (NYSE: SNAP) have been revalued downwards in 2022 due to the general weakness of the market and the growing risks of recession. However, Snap is advancing its business: the company is growing daily active users and revenue quickly and free cash flow is now profitable. In addition, the company has presented a strong revenue forecast for the second quarter and I hope Snap grows its free cash flow margin in the future!

Stock price trend
Data by YCharts

Key metrics show the strength of the business

Snap saw continued strength on its platform during the first quarter. On Snap’s Q1’22 earnings card, the social media company revealed that its average daily active users, the most important key metric for platform companies, rose to 332 million, showing an increase in 18% year-on-year. Snap added an average of 52 million daily active users over the last twelve months and also added an average of 13 million daily active users in the last quarter alone, with 10 million users coming from markets outside of North America. Northern Europe. The average daily growth of active users in North America and Europe remained moderate in the first quarter of 2022, which means that most user growth and involvement will come from regions outside these two saturated markets in the future.

Snap - Daily active users - By geography

Snap

Snap is expanding its content offering and developing its partner ecosystem to increase engagement. According to the social media company, 250 million Snap conversations were related to the augmented reality of Snap on average every day during the first quarter of 22. Augmented reality products are a way for Snap to attract users especially younger people who make up the main audience of the platform: most users are between 13 and 24 years old. Using augmented reality helps companies selling products on the Snap platform increase conversions and reduce the rate of return on shipping.

Snap’s revenue during the first quarter of 2022 rose 38% year-over-year to $ 1.06 million, with the top-tier line-up growth in Europe at 43% year-on-year. However, Snap’s revenue performance was strong worldwide, including North America and the rest of the world.

Earn income by geography

Snap

Good prospects for the second quarter of 2022

Snap sees revenue growth of 20-25% year-over-year for the second quarter of 22, bringing Snap’s expected revenue to $ 1.18 million to $ 1.23 million. Boost revenue growth indicates that advertisers continue to see Snap as a strong advertising platform.

Average revenue per user

Snap’s average revenue per user / ARPU, the second-largest metric after daily active users for social networking companies, slowed in the first quarter of the 22nd, with a 36% slowdown in the first quarter. year prior to 17% in the first quarter. . After a strong fourth quarter in terms of advertising spending, the first quarter usually sees weaker performance metrics.

Average revenue growth per user has been moderating across all Snap geographies over the past year, but ARPU growth was still far from weak at 17% in the first quarter of 2022. North America continues being the most lucrative market for Snap, as advertisers pay high advertising fees to promote their products and services on the platform.

SNAP

Q1’21

Q2’21

Q3’21

Q4’21

Q1’22

ARPU

$ 2.74

$ 3.35

$ 3.49

$ 4.06

$ 3.20

Year-on-year growth

36%

76%

28%

18%

17%

North America

$ 5.94

$ 7.37

$ 8.20

$ 9.58

$ 7.77

Year-on-year growth

66%

116%

49%

33%

31%

Europe

$ 1.48

$ 1.95

$ 1.92

$ 2.54

$ 1.93

Year-on-year growth

36%

76%

34%

33%

30%

FILA

$ 0.93

$ 1.07

$ 0.98

$ 1.12

$ 0.95

Year-on-year growth

(7)%

20%

3%

1%

2%

(Source: Author)

Free cash flow is positive

Despite declining average revenue growth per user, Snap once again offered a positive free cash flow. Snap’s free cash flow in 1Q’22 was $ 106.3 million and the company recorded three consecutive positive FCF quarters. Free cash flow in the last twelve months was $ 203.3 million, representing a free cash flow margin of 4.6%. As Snap’s free cash flow is increasing, I expect FCF’s margins to improve in the future as Snap’s augmented reality products continue to see a growing adoption by advertisers.

Get the free cash flow

Snap

Snap’s growth is counting down again

Snap has once again fallen into a downward trend in 2022 creating an opportunity to buy the shares of the social media company at a discounted valuation compared to its history. As of expected revenue for fiscal year 2023, Snap shares have a sales multiplier of 4.9 X and revenue is expected to grow by at least 33% in each of the next three years.

SNAP

AF 2022

AF 2023

AF 2024

Sales

$ 5.47 million

$ 7.70 million

$ 10.48 million

Year-on-year growth

32.9%

40.8%

36.1%

PS relationship

6.96 X

4.94 X

3.63 X

(Source: Author)

Historically, Snap has achieved a much higher valuation based on revenue.

PS Snap relationship
Data by YCharts

Risks with Snap

Obviously, a deterioration in growth prospects and cuts in advertising budgets pose major business risks for Snap’s platform business as well as for stocks. A decrease in daily active users and a weakening of ARPU trends also pose risks to the social media platform.

Final thoughts

Snap’s shares have been showing weakness again lately, which is largely the result of deteriorating growth prospects in the global economy. However, Snap is experiencing strong growth in three of its most important key metrics: daily active users, revenue, ARPU, and the company is now a positive free cash flow company with the potential to increase its FCF margins. I think the risk profile right now is still very skewed upwards and Snap shares are a buy!



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