Should I Buy Snapchat (SNAP)? Finance YouTuber Analysis

The YouTuber is bullish on Snap, highlighting the success of its Snapchat Plus paid subscription tier, which has achieved $1 billion in annual recurring revenue and 25 million subscribers. He notes this represents a fundamental shift in their business model, with annual losses shrinking by 65% and net income seeing a 400% leap in Q4 last year, indicating a strong move towards profitability beyond advertising.

“Snap isn't just an ad company anymore. They've built a second revenue engine that didn't even exist 2 years ago, and it's already at a billion dollar run rate.”

The YouTuber is strongly bearish on Snapchat, citing excessive stock-based compensation that dilutes shareholders and prevents per-share profit growth, despite revenue growth. He believes the company's management team needs a complete overhaul to focus on sustainable per-share profit growth.

“And until that happens, I am not going to be touching the stock with a 10-ft pole.”

The YouTuber suggests Snap Inc. as a dark horse pick, highlighting its advanced AR lens platform and generative AI tools for 3D video, which are years ahead in spatial development. While its main Snapchat platform faces an uncertain future, the real value lies in its AR technology, making it a potential acquisition target for larger companies like Apple due to its AI lead.

“Another darkhorse stock here in Snap Incer SNAP with shares down 22% just in the last year but has a surprisingly strong opportunity in its AR lens platform a generative AI tool for 3D video that is years ahead in spatial development right now.”

Snap has a $1 billion convertible note due in May 2027 with a conversion price far above its current stock price, making refinancing or other actions necessary. While the company is reporting positive net income, its free cash flow is minimal, and it has significant long-term debt, indicating that dealing with this convertible debt will be challenging and could impact the stock.

“This is not an absolute killer but will definitely make life harder for a lot of these companies and other companies out there over the next few years as they look to either refinance this debt or issue shares to pay it off.”

The YouTuber purchased Snapchat due to the overall growth in social media platforms like TikTok and YouTube. He acknowledges it's a smaller, more volatile play, which is why it constitutes a very small position in his portfolio.

“Now, Snapchat I purchased because I think social media is taking off tremendously. You look at Tik Tok, you look at YouTube, you look at Instagram and Snapchat just everything is going up and Snapchat's really a smaller play, more volatile, but that's why it's a very small position I have in Snapchat.”

The YouTuber suggests Snap is an interesting long-term play in augmented reality, noting their Spectacles are available to developers now, unlike Meta's prototype. Snap's strategy of not imposing a developer tax could foster a stronger ecosystem, giving them a head start in the AR market despite Meta's larger resources.

“for now in augmented reality the leader the leader could be snap and I think that's a really surprising position given the resources that meta has put into this technology”

The analyst believes Snap's new Spectacles, with their standalone operating system (Snap OS) and horizontal business model for developers, could create a unique and compelling augmented reality ecosystem. This approach differentiates Snap from competitors and could lead to significant adoption if developers build engaging applications, potentially making the company a long-term winner despite past execution issues.

“This was one of the first Hardware products that I've seen in quite a while to really pique my interest and say this could really change things.”

The analyst currently holds a very small position in Snap, viewing it as a moonshot with potential in social media, advertising, and augmented reality. While recent earnings showed positive signs like 21% revenue growth, increased daily active users, and positive free cash flow, the company is not yet profitable and needs to demonstrate sustained revenue growth and cost control over several quarters before he would consider adding to his position.

“very small position for me but not one that I'm going to be buying until we see that this is actually a step change in the way that snap is operating as a business”

The analyst advises avoiding Snap, despite its potential to gain some advertising revenue if TikTok is banned. The company has struggled with profitability and has not effectively capitalized on its growth in users and revenue, making it less attractive for investor attention compared to Meta or Alphabet.

“not a company that I think deserves a lot of investor attention but at least worth keeping an eye on if Tik Tok is not operational in the US”

The YouTuber advises avoiding Snap due to its consistently poor financials, including declining revenue per user and significant net losses. He highlights the high stock-based compensation leading to dilution and argues that the social media market is a 'winner-take-all' environment where Snap struggles to compete with larger players like Meta, leaving it with limited profit potential.

“I don't see a recovery for SNAP given the competitive Dynamics in social media right now.”

Hoium advises avoiding Snap, citing its significantly lower gross profit and negative operating income margins compared to Meta. He suggests that Snap is stuck in the 'middle' of the social media market's 'smiling curve,' lacking the scale to attract advertisers effectively and struggling to compete with Meta's dominant position.

“it makes it really tough to make an investment case for companies like Pinterest and Snapchat”

The analyst advises avoiding Snap due to its high stock-based compensation, which he calculates at $240,000 per employee annually. Despite positive operating cash flow, the company's net losses are significant, and revenue per user is declining. He believes the company is not well-managed and will struggle to create shareholder value until it can grow revenue profitably without excessive stock-based compensation.

“snaps business is definitely not trending in the right direction but what makes matters even worse is that stock based compensation is so high that I don't see any way that the stock is going to be going up in a meaningful way anytime soon.”

The analyst expresses cautious optimism for Snap, suggesting it could surprise investors due to its 'underdog' status. Key catalysts include potential revenue growth from Snapchat Plus subscriptions, momentum in its augmented reality business, and management's ability to control operating costs and stock-based compensation. The company's strong cash position provides a long runway for experimentation.

“I'm definitely cautiously optimistic going into this quarterly report.”

The analyst sees Snap as a potential turnaround play, highlighting its substantial cash reserves and positive free cash flow despite negative net income due to stock-based compensation. The cash provides flexibility for acquisitions, but investors should be cautious due to significant convertible senior notes on the balance sheet.

“Snap is an interesting spot where if they can take advantage of this current place where they have a bunch of cash they can maybe bolt-on Acquisitions that will add to that free cash flow that could be an interesting spot for them.”

Travis Hoium identifies Snap as a company that could benefit from the AI trend by integrating AI into its platform to add value for users. He argues that the most successful AI investments will be in companies that can take readily available AI technology and apply it creatively to their products.

“Spotify snap these are the kind of companies that are exploring artificial intelligence and finding ways to utilize it in really interesting ways”

The YouTuber believes Snap's new 'My AI' feature, integrated into Snapchat Plus, represents a unique and potentially successful application of AI for entertainment, unlike competitors. He argues that if this feature gains significant user adoption, it could be a major growth driver and a 'home run' for the company, especially given Snap's willingness to take risks as a smaller social network.

“I think this is a really good chance to take for snap and if it works out well it could be a really great move for shareholders as well”

Snap's cash flow from operations has been largely negative and inconsistent, showing no clear path of growth. The company's share count is also growing, indicating they are issuing more shares to cover cash burn, which is a negative sign for investors.

“cash flow from operation has been largely negative... they're all over the map there's no clear path of growth it's positive it's negative as they kind of monkey with the accounting”