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Just three weeks ago, I analyzed what no one else was talking about, at least not to the degree it deserved. Analysts and investors were completely missing the potential Snapchat+ had on the financials for Snap (NYSE:SNAP) and the future landscape of social media. I even went so far as to put numbers to paper, stating my estimates publicly. Then, not even two weeks later, Snap’s CEO Evan Spiegel shared an internal memo not only affirming my bullish case for Snapchat+ but proving my estimates conservative. So it’s time for investors to wake up to the tide turning in the social media space and how Snap is leading the only successful venture away from advertising.
As a refresher from my last article, Snapchat+ is a game-changing investment event because of the dim outlook for social media companies to grow revenue from advertising. Between iOS privacy changes hurting Meta Platforms (META), Snapchat, and many others and the pullback of advertisers due to economic concerns, these companies have no choice but to find other ways to generate growth.
Twitter (TWTR) was one of the first to attempt this branching out last year with its Twitter Blue subscription service. However, it has proven to be a flailing venture at best and a dead-on-arrival product at worst, as it only has raked in $4M since its launch in June of 2021. This was a lesson in how not to create a free-from-ad-bondage product.
Then Snap released its Snapchat+ product in June of this year. And in under six weeks, the company announced it had 1M paying subscribers. This equates to just under $4M in revenue – per month – blowing away Twitter’s half-hearted attempt at a subscription product.
This was when I started crunching numbers and potential.
In my late-August Snap article, I outlined how just 10% of the addressable market of 260M users – those ages 18-49 – would generate $312M per quarter. But I wrote this as a long-term view, and I expected this kind of momentum to take the company through 2025 to accomplish. However, taking a more near-term view, I contended 5M users over the next 12 months isn’t out of the question:
This is a long-term view of the subscription landscape, but 5M users in a year [doesn’t] seem too farfetched considering the 1M it acquired in a month and a half. A long-term view of 26M users in three or four years means the Snapchat+ business could generate upwards of 20% of the company’s revenues by the end of 2025.
Five million users would generate $60M per quarter, or $240M a year, by August of 2023. It’s likely to be just shy of 5% of quarterly revenue by then. But by all accounts, being live one year with Snapchat+ with those numbers would be a huge success. By the end of 2023, the service could be near 6.5M subscribers – keeping my run rate slowing as time goes on. This 2023 year-end subscriber number would generate $77.8M a quarter, or $311M per year.
I considered this to be – and still do – significant high-margin revenue the company desperately needs to shift away from reliance on ads alone.
The CEO couldn’t have agreed more.
On September 6th, just a week-and-a-half after my article, an internal memo to Snap employees was circulated and then leaked, outlining the chief’s goals for the next year-and-a-half. It contained business goals, financial goals, and the revamped long-term vision for the company.
Most importantly, it contained Snapchat+ revenue milestones.
Those milestones included $350M in Snapchat+ revenue and 10M subscribers by the end of next year. $350M in revenue from the subscription product means an average of 7.3M subscribers for 2023 (maintaining a $3.99 per month price). I was at 5M average subscribers for the year and 6.5M by the end of the year. The CEO’s numbers are 12.5% higher in revenue and 54% higher in subscribers than my numbers. My estimates proved to be conservative versus the momentum and success of the product the CEO sees. This furthers my bullish thesis upfront and pushes it beyond by including goals unrelated to Snapchat+.
Now, these goals don’t mean the company will achieve these numbers; however, laying these goals out in September of 2022 means the company has plenty of time to deliver on them. For example, analysts have an average estimate of $5.46B in 2023 revenue. Spiegel is calling his shot at $6B, or nearly 10% higher. That’s not impossible and is likely probable if ad spend returns even nominally, and Snapchat+ continues to take off toward the CEO’s target. If analysts haven’t taken Snapchat+ revenue into account, advertising only needs to improve $200M over the year to reach his $6B figure.
I also consider the goal for 450M DAUs (daily active users) pertinent to the Snapchat+ thesis. As DAUs grow, so does the TAM (total addressable market) for Snapchat+. I estimate my TAM for Snapchat+ will grow from 260M to 338M, given the CEO’s goals for 450M DAUs and a consistent 75% demographic of those ages 18-49. It brings my 2025 potential to $405M in revenue per quarter, amounting to $1.6B in yearly Snapchat+ revenue – 145% of the most recent quarter’s revenue of $1.11B.
This means the valuation – the lowest it has ever been during Snap’s public life – is likely showing undervaluation as growth estimates are now too low.
If Snap merely trots along at a four times sales multiple, but growth hits the $6B mark next year, then its stock is worth $13.41. But I don’t expect the stock to maintain historically low valuation levels if growth does indeed return.
Even during the weakness in FQ4 ’18, where user growth was highly questionable, the stock traded only as low as 5.9 times sales. It was Snap’s version of Facebook’s “oh no, will mobile work?” moment not long after its IPO in 2012. Even amid its existential crisis – and, mind you, the height of my bearishness on the stock – the market didn’t consider under 5.9 times sales appropriate. At this 5.9 multiple and $6B in 2023 sales, the stock is valued at $19.80, or 75% upside from Friday’s close.
Sure, you can argue “this market environment” will not reward unprofitable unicorns. I can’t argue against this. However, Snap is proving it’s not just a wannabe social media company following in the footsteps of giants anymore with Snapchat+. Its early success with this new product proves it can move away from advertising revenue, and, as I argued in my previous article, its users can be monetized directly.
Snap has gone from a dim outlook to one with massive potential in a relatively short period, now with a structured timeline to see it proven out. I continue to favor Snap over Meta Platforms as the latter struggles to make up for iOS privacy changes without any clear monetization strategies outside of ads and user targeting. The acceleration of user growth is also a telling sign Snap has the momentum to increase not only its DAUs (daily active users) for advertisers but also its TAM for Snapchat+. Combined with the historically low valuation, Snap looks like a prime candidate to head back to even just a fraction of its former glory days.
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This article was written by
Joe has a Bachelors of Science in Computer and Electrical Engineering. He follows technology related companies as well as blue chip industrials and consumer products. Joe writes mainly about technology companies, especially ones that he uses and consumes. Knowing the technical side of the products helps him in his analysis of what the product impact is to consumers and the markets they reach. Joe’s interests lie in tech and growth stocks.
Joe works for a technology contracting company as a Release Manager working with Dev/Ops tools and integrating CI/CD systems. This entails automating workflows and deploying compiled artifacts using change control/version control software and deployment automation tools. The sector of his work is governmental and deals with the department of health. He previously worked in the IT field of the healthcare industry for a major teaching hospital and practice group working mostly with integration engines for use with hundreds of systems as well as end user application access and security including single sign-on.
Joe enjoys a variety of hobbies including playing drums and building racecars made for the ice and asphalt. He raced nationally in college for Baja SAE and continues to build racecars and race on a regional level both on road courses and frozen lakes.
Disclosure: I/we have a beneficial long position in the shares of SNAP, META either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.