Snap: Snapping Again (NYSE:SNAP) | Seeking Alpha

Shares of Snap (NYSE:SNAP) have moved sharply lower again as the company had its new big disappointment in store for investors. My last take on the company, although it was not really focused on the business of Snap, but more so the dilutive practices of ignoring stock-based compensation, dates back to July.

Snap has been a poster child of ignoring large stock-based compensation expenses in its non-GAAP reporting, yet the extent of these expenses and importance, in terms of the payment package to workers, made that this practice looked really non-sustainable to me.

The Impact of Stock-Based Expenses

In July, I observed that Snap grew 2021 sales in a spectacular fashion, with revenues up 64% to $4.1 billion, as the earnings numbers diverged wildly. After all, a GAAP operating loss of $702 million was reported, yet at the same time adjusted earnings of $775 million were posted as well.

A difference of more than $1.2 billion between the net adjusted and GAAP earnings was mostly due to a $1.1 billion stock-based compensation expense. The extent of this expense is huge at nearly 30% of sales and with over 5,600 workers the average stock-based compensation expenses totaled $200k per worker!

That seems fair to say that this expense is a crucial component of compensation, rather than an extra, or an incentive. Hence, these expenses are real and at some point in time there comes a day of reckoning, not just as investors incur gradual dilution, but more as they realize a business is nonprofitable as these are real costs.

What Happened Again?

After posting spectacular growth in 2021, the company was against some tough comparables which became visible so far this year, having had dismal implications on the share price. After all, Snap appeared to be one of the stronger performing businesses within social media (even as it was still posting losses) last year. An $80 stock this time last year has seen its second digit disappear here with shares down to $7 and change.

First quarter revenues for 2022 rose 38% to $1.06 billion as GAAP operating losses narrowed by 11%, still coming in at $272 million. The company already guided for softness, with second quarter sales seen up just 20-25% and EBITDA seen around $50 million, which compares to a $65 million number in the first quarter.

As it turned out, second quarter revenues rose just 13% to $1.11 billion due to currency headwinds, competition between ad providers, but moreover general weakness in the advertising market with the economy cooling down. This resulted in some utterly disappointing numbers on the bottom line with EBITDA posted at just $7 million and operating losses reported at $401 million. This shows a big deterioration on the bottom line, even as sequential sales were increasing. The degree of uncertainty even made that no guidance was issued for the third quarter.

Shares fell another 30% this past week as the third quarter results came in really short of expectations, even as no formal expectations have been given by the business. A 6% increase in sales to $1.13 billion is perhaps not that bad, with daily active users up 19% to 363 million, as an indication of stronger underlying usage trends, with softer advertising really hurting the business. Adjusted EBITDA came in at $73 million with operating losses increasing to $435 million, largely driven by a $155 million restructuring charge.

These are dismal results and by now the share count has risen to 1.71 billion shares, granting the business a $13.7 billion equity valuation at $8 per share. The enterprise value comes in around $13 billion if we assume a $3.7 billion convertible debt loan as a regular loan at these low prices. If we strip out stock-based compensation expenses, losses came in at $280 million, entirely driven by still a huge $343 million stock-based compensation expense.

What Now?

The truth is that Snap is trading around 3 times sales, and while revenues are still increasing a bit in a very tough environment, it remains the losses which are still huge by all means, realistically running at above a billion on just over a $4 billion run rate in terms of sales.

Moreover, the near term will be tough as no guidance has been given for the fourth quarter, as the hope is that revenues are flat, which will likely be detrimental on the bottom line despite restructuring efforts. The only bright spot is that daily active user names are surpassing revenues by a big margin, as the increase in time spent is even greater which alleviates concerns that time spent on competing platforms is hurting the business in a huge way, which simply does not seem to be the case.

Hence, this continues to be a very risky position and at the same time many peers have sold off, and their valuations have been much more modest as well, all while many of them are profitable. This makes that concerns about profitability or cash burn is not really an issue at some of these names, notably Meta (META) of course.

While I am normally quite keen to go bottom fishing and I see positive engagement drivers here, the fundamentals remain too dire for me to get comfortable to buy the dip here, as the fundamentals in terms of the numbers and business strength and its business model do not appear to be adding up.