SNAP is becoming the social media leader (Q4 earnings report)
Portfolio: They are grabbing market share and reaping cashflow along the way
I vividly remember SNAP's Q3 earnings call - it was a total downer. There were many questions about the negative business impacts of the iOS IDFA changes and their management had few concrete answers. This week’s Q4 earnings call was a complete turnaround - oozing with confidence because they have figured out how to succeed in this new arena. They developed tools for their clients to measure and analyze the impact of their targeted ads, enabling them to refine their ad spend. The IDFA impacted business was also confirmed to be a small portion of their overall revenue stream. All in all, they grew and beat expectations on several fronts - top line and bottom line.
Look at this slide deck they published. All the metrics are moving up and to the right (growth up, profits up, unit costs down). As investors, we like this direction. Buyers stepped in after hours and shorts were scrambling to get out.
Here is what stood out to me in SNAP's Q4 earnings report: (refer to the SNAP financials map below)
Revenue growth - Q4 YOY revenue (42%) handily beat guidance by a whopping 10% and annual revenue rose 64% YOY. Sequential QOQ revenue beat guidance by 9% and grew double digits (22%). They guided for $1080M revenue in Q1 2022, which is typically their weakest quarter in the calendar year.
Profitability - Gross margins are steady at 58%, having increased in 7 of the last 8 quarters. Adjusted EBITDA beat guidance by 87% and adj. EBITDA margins are expected to be safely in the double digits going forward. Net income also came in at $23M...their first signs of true profitability and they are just getting started.
Cashflow - They generated operating cash flow of $294M and free cash flow of $223M in FY2021 and stated that they feel confident that they are now able to self-fund their growth needs (just what we want in a rising rate environment).
Market share - This is where the rubber meets the road in social media. SNAP's DAUs have increased by double digits YOY for the past 8 quarters and by 20%+ for each of the past 5 quarters; this growth is consistent across all markets. ARPU has also strongly increased for the past 6 quarters and so far they have captured only 5% of total global TAM for their target audiences. FB mentioned that they are losing younger DAUs to other platforms - Snapchat is "snapping" up these users (Tik Tok is the other usurper-in-the-making). FB is also struggling with the IDFA situation, while we now know that SNAP is not.
Debt - remains steady at $2.6B along with over $3.6B cash on the balance sheet, being continually replenished by operating and free cash flow.
Products - Snapchat is ever evolving their product on many fronts - I am most excited about the Lenses which enable their AR/VR capabilities which in turn bring in advertiser clients who want to engage Snapchat's users. I also see Snap Map as a major monetization engine which will allow businesses to curate their virtual presence in the app, entice users with deals and enable direct in-app shopping experiences. The Scan feature in their camera software allows users to look up info on animals, plants, food, images, cars etc - the business use cases for the AI powered feature are still being tallied.
So here is my plan regarding SNAP: