Snapchat (NYSE: SNAP), continues to face fundamental issues and has resorted to restructuring the company during the quarter by announcing the layoff of its Web3 team. Snapchat reducing its headcount resulted in the stock rallying by over 7% during market hours as investors look forward to the company getting back on track.
Snapchat's management has started to look at a more sustainable business model and stated the following:
“As a result of the company restructure, decisions were made to sunset our Web3 team,”
Snapchat's CEO Evan Spiegel stated the following:
“Our financial results for Q2 do not reflect the scale of our ambition". "We are not satisfied with the results we are delivering.”
Revenue in the latest quarter grew by only 13%, and investors have been taking another look at the future viability of the business. As interest rates continue to increase many tech companies which were previously seeing their stock price increases at record levels, have fallen out of vogue. The stock is down over 85% for the year, and things are looking increasingly circumspect for the tech sector in general.
Snapchat’s revenue has been facing issues as advertisers have been reassessing their investments in general. The advertising-based revenue model has been under pressure everywhere, and Snapchat’s management is scrambling to get things in order, as issues such as Snapchat’s demographic, which does not have the purchasing power to attract big value advertising, is affecting the company's growth
ARPU still remains relatively low, and low penetration outside of the United States leaves plenty of room for revenue to grow. But, fewer users have taken to Snapchat in markets such as China, and Europe, where a mix of culture, and local options are clearly the primary choice. The potential to capture European and Asian markets is what is keeping investors committed to the stock, but it remains to be seen whether management will execute in these markets.
Snap’s valuation remains pretty reasonable with current price-to-sales at around 3.65 and with operating cash flow currently standing at around $260 million, the stock is unlikely to see a significant downside. The current reduction in headcount is likely to improve cash flow but the increase is not likely to be large enough to result in a permanent solution. Snap may be slightly oversold, and the social media businesses, in general, tend to be cyclical, and sometimes quickly fall out of favor, as we have seen with a number of historical enterprises. And competitors in the space have started to see users slowly move away from their platform, Snap's management will also be reassessing their own future. Snapchat’s under-penetration and stickiness of its users is a positive sign for now.
Snap continues to improve its business model as well and has expanded its sources of revenue, bringing in multiple corporate partnerships as it looks to continue to make the business more durable. The partnerships and content strategy is not going to be an easy one considering the fact that many competitors continue to struggle with their own content business, as costs continue to increase, and returns have not lived up to forecasts.
What’s likely in the coming quarters?
Analysts have predicted that growth could be back on track in the coming quarters, but that is dependent on whether advertising flow recovers, which is unlikely, considering that increasing numbers of global companies are paring back their advertising outlays. Although growth may not be as low as it was during the previous quarter, it is not likely to rebound to levels in previous years for a few more quarters. The trend of lower advertising outlays is likely to remain an issue for a while, at least until corporations are more sure about the economic outlook.
Finally, rates are unlikely to top until the labor markets start to show significant weakness or inflation comes down, and for the foreseeable future, Snap’s stock is likely to remain under pressure. Technical for the company also points to a market that remains overall bearish for now, although the put-to-call ratio remains bullish at 0.7. combined with an RSI that has been slowly increasing, indicating that the stock is slightly oversold, but, any bull rally as a result of mean reversion is not likely to last. But if the stock does continue to fall, there may be an opportunity for long-term investors to enter the market.
