Snapchat: Initiating Coverage With "Buy" - Is SNAP The Next Trillion-Dollar Company?

Seeking Alpha2021-09-20

Written by AlphaTech Equities Summary We initiate coverage of SNAP with A “Buy” rating and price target of $102, imputing an upside of 42.2% from its current share price. We see a long runway for ...

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KLS
2021-09-20
KLS
Buy
Jaywei
2021-09-20
Jaywei
Good luck
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Even though a challenger to Facebook(NASDAQ:FB), SNAP has a strong track record of successful innovations, showcasing multiple successful product introductions which now mostly have all been encroached upon by rivals such as its disappearing messages, Stories, vertical video format and AR lenses to list just a few.\nGiven its strong focus on privacy and limited quantum of personal information, users were willing to share on its platform, investors wereskepticalof SNAP’s monetisation capabilities vs Facebook in the past. However, a range of successful investments to improve ad targeting and ad measurement capabilities in the last two years, coupled with the restructuring of its sales team to focus on becoming sector specialists (away from being regional specialists) has seen SNAP increase advertisers ROI on its platform. This in turn has resulted in accelerating its own eCPM (revenue per impression) by 50% to 100% over the past year and powered revenue growth which has climbed @45.7% CAGR over the past two years to 2020.\nWe see increased recent investments mostly to grow its vertical focused sales team and continued innovation, especially that in AR with the aim of increasing engagement of users, ultimately improving ROI for advertisers as both, commendable and disciplined. We see management forecasts of 50% revenue growth over the next three to five-year cycle as achievable given that monetisation (SNAP ARPU @$10 vs $32 for FB) remains relatively in early stages. After SNAP turned adjusted EBITDA positive in Q3 of 2020, we see a clear path to profitability corroborated by the high operating leverage inherent in social media platform businesses.\nHowever, SNAP does not come without its risks, as we see the recent introduction of iOS 14 software update, limiting advertisers' ability to track, retarget and measure ads displayed to Apple(NASDAQ:AAPL)users as especially disconcerting. Majority of SNAP’s revenue is still generated in the US, which is led by the Apple user base (54.4%market share of smartphones). We believe the next two quarters will be the high noon for SNAP’s long-term growth trajectory as the impact of the iOS 14 update becomes clearer on its earnings.\nEven though valuations are pricey, we believe the premium is warranted, emblematic of strong recent execution and best of breed growth profile. We see EV/REV of 25x 2022E Revenue as fair and see management outdoing its own bullish revenue growth expectation of CAGR @50% over the next three- to five-year cycle. This confers us a fair value of $102, imputing an upside of 42% from its current share price. We initiate coverage on SNAP at “Buy”\nOngoing penetration of smartphone users on the back of the relaunch of its Android version will drive DAU growth for SNAP\nAfter a blip in SNAP's DAU growth in 2018 where the growth stalled due to a technical glitch in its platform, SNAP’s DAUs have increased at an average CAGR of 20% over the past two and half years to reach 293m users in Q2 2021. We see global DAUs increasing at 11.6% CAGR over the next three years driven primarily by:\n1. Relaunch of its Android version in Q1 2019:In Q1 2021, management reported that its total number of android users had surpassed that of iOS, speaking volumes of the quality of its relaunch just two years ago. Previously management had confirmed performance issues in its app in 2018 on android phones which have now been completely resolved.\n2. Localizing content and language:SNAP continues to invest in expanding its team to support its global community, including investing in region-specific performance improvements of its services, increasing localization of content, improving its creative tools, and offering more language support to its global community outside the United States. A case in point being SNAP’s launch of its first local-market Snap Original in March 2021 with Phone Swap India.\n3. Marketing:Furthermore, it’s broadening its sales efforts and supplier partnerships to drive growth in new geographies where management is seeing increasing traction with users.\n4. Augmented Reality:Another key accelerant for SNAP is its ongoing investment and progress/popularity of its Augmented Reality products/services. We believe SNAP has become the leading AR social media platform and continues to execute well on unlocking the significant multi-billion-dollar opportunity inherent in the e-commerce industry.\nDespite clocking an impressive growth in DAUs (Daily active users) over the past few years (Figure 1), SNAP’s penetration of the global smartphone user base at 4.7% is relatively in its nascence. SNAP's penetration is significantly lower than larger rivals such as Facebook @30.7% (Figure 2), albeit werecognizethat SNAP’s target age group (16–39-year-olds) is significantly narrower than that of Facebook. In our model, we forecast this to climb to 6.4% by 2026.\nFigure 1: SNAP’s Global DAU (M)\nSource: SNAP Company Filings\nFigure 2: Penetration of SNAP DAUs of global smartphones vs Facebook\nSource: SNAP Company Filings\nNote: Q2 CAGR is for half year 2021 only\nIn North America, SNAP had 95m users in Q2 2021, growing at 7.1% CAGR from the beginning of 2018. This represents a 32.1% penetration of all smartphone users in North America. Facebook's DAU penetration of North American smartphone users currently stands @66%. We expect DAU's to continue to increase in the mid-single digits for SNAP in North America even after the pandemic as reopening of economies will lead to people going out more and expanding their social graph.\nSnapchat has 95m users in North America or 3.3% of total smartphones users\nFigure 3:North America DAU (M)\nSource: Snap Inc.\nFigure 4:Penetration of DAUs in N. America\nSource: Snap Inc.\nNote: Q2 CAGR is for half year 2021 only\nIn Europe, SNAP had 78m users in Q2 2021 growing at 11.1% CAGR from the beginning of 2018. According to our analysis, this represents c.12 to 18% penetration of all mobile subscribers in Europe. We expect DAUs to continue to increase in the mid-single digits for SNAP in Europe driven primarily by SNAP dedicating investments to increasingly localize content and add more language support.\nSnapchat has 78m users in Europe\nFigure 5:Europe DAU (M)\nSource: Snap Inc.Note: Q2 CAGR is for half year 2021 only\nIn ROTW, SNAP had 120m users in Q2 2021 growing at 45.5% CAGR from the beginning of 2018. We expect DAUs to continue to increase in the mid-single digits for SNAP in the ROTW, driven primarily by investments in localising content and language, adding new marketing partners and increasing uptake of AR lenses added by its global community.\nSnapchat has 120m users in ROTW\nFigure 6:ROTW DAU (M)\nSource: Snap Inc.Note: Q2 CAGR is for half year 2021 only\nRevenue per user is SNAP’s most significant lever of growth\nDespite a 2020 penetration rate of 31.3% of total users in the US, SNAP represented only 3.9% of total US social media advertisement spend. Its penetration of users in the US is especially low when compared to Facebook, (albeit we recognize SNAP's younger audience bias narrows its relative acreage vs its bigger rival). This highlights the long runway of growth for the company, as they begin to improve ROI for advertisers driving higher monetisation.\nFigure 7:Facebook vs SNAP DAU's and ARPU\nSource: SNAP and Facebook company filings\nRevenue per user has been SNAP’s biggest growth driver over the past couple of years driven primarily by…\n\nRestructuring its sales team to be vertical focused\nRecent investments in increasing ROI have paid rich dividends\nVideo advertising\nReplicating successful US playbook in other markets\nAR impact on E-commerce – as management continues to execute well on unlocking the multi-billion-dollar apparel and clothing opportunity.\n\nVerticalizationstrategy has boosted ARPU growth in North America\nAbout two years ago, SNAP made a conscious decision to restructure its sales team to becoming sector specialist rather than continue down the track of being regional specialists. This transition has proven to be extremely successful for the company as ARPU increased by 35% in 2019 followed by 41% in 2020, measurably higher the prior year ARPU growth of 18% in 2018. Over the past 12 to 18 months, SNAP has reported measurable success in verticals such as E-commerce, Consumer Packaged Goods, Tech, Streaming, Online Education and Telco.\nWhilst the impact from Apple's iOS 14 IDFA upgrade on SNAP's growth profile remains indiscernible, we derive some confidence from management's recent strong Q3 guidance and see the risk of the Apple update limiting the ROI for advertisers as manageable. As such, we expect ARPU to grow by 39% in 2022, followed by 34% in 2023 (Figure 8).\nFigure 8:SNAP’s NA ARPU growth\nSource: Company Filings & AlphaTech Equities\nPrior to implementing the verticalization strategy, a salesperson in the Midwest could serve advertisers from a host of different sectors including, McDonald's, Sprint, Target, T-Mobile, Taco Bell, Gap, Red Bull and Coca-Cola. This lack of focus restricted SNAP to build on advertising expertise required to serve individual verticals and drive higher ROI for clients. After restructuring, all account executives were made in charge of specific sectors rather than regions. An example being that all telecom account executives were made in charge of all advertisers in the telecom space only. This allowed SNAP’s account executives to work more closely with clients in the telecom sector, helping them problem solve and reach advertising goals. To connect these advertisers with audience, SNAP developed a more sophisticated suite of ad products and measurement tools, driving increased ROI for telecom clients.\nOngoing investment in increasing ROI is paying rich dividends for SNAP\nBy improving its advertising platforms by tweaking its ad measurement and optimization capabilities, SNAP has increased ROI for advertisers, in turn attracting more advertisers to its platform as it saw its active advertiser base doubling YoY in Q1 2021. Half of SNAP’s revenue is derived from direct response campaigns. Revenue from pixel purchases, which allows advertisers to track and retarget customers, was up 3x YoY in Q1 2021. It’s a similar story for SNAP’s Subscription goal-based bidding which also grew 3x YoY in Q1 2021.\nSNAP has always been known to be a laggard when it comes to delivering the same level of targeting capabilities vs Facebook. This has resulted in lower ROI for its advertisers. To counter this SNAP has been investing heavily to increase the sophistication of its ad platform over the past three years and recently claimed that it has reached “feature parity” with the largest advertising platform (Facebook) from the perspective of targeting capabilities driven by goal-based bidding optimizations and ad products.\nWith the aim to increase ROI, we see SNAP’s recent investments in ad measurement and optimization as being extremely successful for clients, in turn increasing its own yield, as evidenced by year-on-year increases in eCPM of 67.0% in 1Q2021 and 122.0% in 2Q2021 (Figure 9). Some of the most successful ad products SNAP has released over the past three years, include its Dynamic Ads, down funnel Goal Based Bidding (GBB). This includes pixel purchase and app purchase, Commercials and Shows, Games and Self-Service AR.\nFigure 9:eCPM Growth has been impressive since the pandemic\nSource: Company Transcripts\nFigure 10:NA ARPU has seen strong growth\nSource: Company Transcripts\nAnother example of how SNAP has successfully focused on improving return on ad spend for its advertisers is its investment in Dynamic Ads format, enabling retailers to implement e-commerce campaigns on its platform that automatically optimizes across the advertisers' entire catalogue. An example being Adidas Canada which as a part of its “Always on E-commerce Strategy”, ran SNAP’s Dynamic Ads, resulting in a 4.4x incremental ROI.\nVideo advertising represents a significant opportunity for SNAP to accelerate ARPU growth\nSNAP was the pioneer of the vertical video format on social media platforms, known for being richly immersive and engaging has seen bigger rivals such as Facebook encroaching on its territory which has copied the format on its platform. Videos represent a significant opportunity for SNAP and other social media platforms to engage its users and drive meaningful results for its advertising partners. SNAP worked closely with Nielsen to help US advertisers gauge the efficacy of reaching their target audiences via Snap Ads. The study revealed how the Total Ad Ratings (TAR) of over thirty cross-platform advertising campaigns reached people on Snapchat versus TV. The study concluded with Snapchat allowing advertisers to increase the reach of its target audiences by 16%. More importantly >70% of Gen Z audience that was reached by Snapchat could not be tapped by TV-only campaigns. This becomes increasingly imperative given the backdrop of people continuing to cut the cord and increasing consumption of mobile content leading to an increased advertisers demand for SNAP’s video ad products such as Commercials.\nFigure 11:Time spent on Traditional vs Digital Media in the US\nSource: eMarketer\nFigure 12:Average time spent on mobile vs TV in the US\nSource: eMarketer\nAnother study in partnership with IPG Media Lab revealed that the short form six-second ads convinced more users to consider purchasing the products featured in the commercials compared to 15-second ads.\nSNAP to replicate its US playbook in other regions with significant digital marketing budgets\nEven though European social media advertisement spend stands at $17.3bn vs $42.2bn in the US (41% of US figure), European ARPU at $5.53 at the end of 2020, represents only 28% of total size of US ARPU@$19.65, highlighting the significant headroom for SNAP to grow in the region. After seeing early success in accelerating revenue by building a robust sector team and increasing localisation, SNAP is now replicating the strategy in regions with markets with meaningful userbase coupled with large digital marketing budgets.\nFigure 13: Social media Ad spend in EU vs NA\nSource: Statista\nFigure 14: SNAP EU vs NA ARPU\nSource: Company Filings\nIn European countries such as UK, Netherlands and France, SNAP already reaches 90% of 13–24-year-olds and 75% of 12-34-year-olds. These developed European countries already see significant digital marketing spend and as such should be the easy low hanging fruits for SNAP to replicate its US playbook in and drive ARPU growth over the next three to five years. Furthermore, in countries that account for over half the world’s digital ad spend, Snapchat already reaches 70% of 13-34-year olds.\nSNAP’s AR capabilities allow it to tap into the significant E-commerce opportunity\nSNAP sees 200m people engaging with its AR features every day as brands increasingly try to find ways to supplement sales from physical brick and mortars even after the pandemic recedes. A study commissioned by SNAP in partnership with Deloitte saw 94% of people are expecting to use AR for shopping at the same level or more in 2022 versus 2021. SNAP’s leadership in both AR capabilities and user engagement ideally positions it to expand AR to new use cases and behaviours. We see SNAP’s young audience to be early adopters of these new technologies and shopping experiences. One of the key verticals SNAP has customised its solutions for is Apparel and Accessories, which is the largest shopping category for US teenagers (Figure 15).\nFigure 15:The apparel, footwear and accessories retail e-commerce revenue in the US ($m)\nSource: Statista (U.S. online apparel and fashion market size 2022 | Statista) and AlphaTech Equities\nGiven its AR capabilities, SNAP has solved many technical challenges in the e-commerce space re online shopping. Some areas where SNAP has already made good progress and reported significant success for its retailers include, trying on a pair of shoes, a watch or sunglasses through the use of its AR capabilities. SNAP allows its users to create and manage their 3D models which can easily be converted into Lenses. A good example is Dior's Lens campaign that allowed users to try on six pairs of B27 sneakers through AR. SNAP promoted the lenses within the Snapchat camera and via Snap Ads, with videos showing runway models playing with the Lens and pushing Snapchatters to virtually try on the sneakers by swiping up. This promotion resulted in a 6.2x ROI for Dior.\nAnother area of progress rescaling for SNAP has been its beauty AR Lenses which allows users to try on an entire catalogue of beauty skews provided by retailers through its Lens Web Builder. Furthermore, SNAP makes it easier to find new fashion items by enabling users to scan a friend’s outfit or use a saved photo or screenshot and shop for similar items.\nSome of the areas on which SNAP is currently working on perfecting include allowing users to try on clothes and make it look realistic in the way that it drapes over the user's body in the right way. This is much more technically challenging, but we believe if cracked could open up a multi-billion-dollar opportunity for SNAP. Furthermore, SNAP has recently made some longer-term investments with acquisitions such as Fit Analytics and Aerial AI, enabling users to find the correct fit and size for clothes, helping reduce returns and drive margins for retailers. SNAP has also recently released some new features in Lens Studio 4.0 moving towards the goal of achieving a full apparel try-on.\nWill Apple’s iOS 14 update on IDFA scuttle SNAP's growth trajectory?\nIDFA; an identifier for advertisers is a unique identifier for devices and is used by advertising platforms such as SNAP to target and measure effectiveness of ads by each user through their mobile devices. With the iOS 14 update, Apple announced that it will enable users to block IDFA at the app level. Presaging the iOS 14 update consumers had to actively opt-out of sharing their IDFA but with the software update users are prompted to opt-in or opt-out of sharing their information. Previously, it is believed that 70% of iOS users shared their information but with the latest iOS update only 17% of users have opted in to share their IDFA as of July 2021.\nThe IDFA update by iOS will see advertising platforms such as SNAP primarily impinged in two key areas:\nAd Targeting:If users have actively opted out of sharing their IDFA, platforms such as SNAP will no longer be able to track and retarget them for advertisement purposes. Platforms such as Facebook and Google have other deterministic variables which allow them to track individuals through their mobile devices such as emails and phone numbers. However, what level of these other deterministic variables is available to SNAP remains an unknown.\nAd Measurement:Previously, Mobile Measurement Partners (MMPs are companies which help apps measure the performance of campaigns) had constructed their measurement and fraud capabilities using the IDFA as a base. But with the update to iOS 14, Apple has announced the replacement API called the SKAdNetwork which will allow apps such as SNAP to collect ad conversion data at the campaign level. However, the new API is widely believed to reduce the quality of the date received by apps.\nSomewhat unsurprisingly, SNAP in its most recent earnings call reported seeing some early signs of demand disruptions as advertisers test and learn in this post iOS app tracking environment. This is especially true in the direct response e-commerce and gaming verticals. We continue to monitor these changes that will impact SNAP’s advertising partners, as it has been coy so far to conclude 1). how long it will take for these changes to be fully adopted, 2). the magnitude of the potential interruptions to demand, and 3). the eventual impact on its longer-term growth trajectory.\nIn what has been seen as a vote of confidence for the social media company, SNAP saw higher opt-in rates by its users versus the industry average which is around 17% on the back of Apple launching its App Tracking Transparency-related changes at the backend of Q2 this year. SNAP believes that the introduction of the tracking changes by Apple came in later than anticipated. Additionally, the pace of updates to iOS 14 by iPhone users was also lagging SNAP’s expectations, allowing advertisers some more space to navigate Apple’s privacy changes. This we believe has pushed the full impact of the Apple privacy introduction into 2H 2021.\nWith the aim to comply with Apple’s latest changes, SNAP enabled advertisers to measure their campaigns through its privacy-protecting measurement stack by introducing Advanced Conversions in Ads Manager. Furthermore, SNAP also launched support of SKAdnetwork version 3.0, with the aim of increasing attribution for advertisers who run Apple’s API.\nSNAP’s shares, even though expensive is poised for further acceleration\nWe believe, much like SNAP's disappearing posts and videos, the opportunity for investors to buy the stock at these levels will not last long. SNAP has traded in EV/Rev range of 18x to 28x over the past 12 months or so which we see justified given its superior execution of its new playbook, leading to best of breed revenue growth profile. We see current street estimates as conservative, caveat by our assumption that the impact from the iOS 14 upgrade will do little to hinder its growth profile going forward. We will monitor Q3 2021 earnings closely for evidence on this, but for now, feel comfortable with management's guidance of 50% rev growth over the next three to five-year cycle.\nFigure 16: EV/REV ranged from 18-28x over the past year\nSource: Koyfin\nWe estimate 2022 revenue of $6.3bn which is slightly ahead of current street forecasts at $6.2bn (MarketScreener) driven by higher ARPU and growth in DAU’s forecast. We see a 25x EV/Rev multiple as fair for SNAP, imputing an upside of 42% from its current share price of $72. We initiate coverage on the stock with a rating of “Buy” for SNAP.\nFigure 17: We get an upside of 42% for SNAP on a 25x EV/REV multiple on 2022E revenue\nSource: Koyfin, Company reports and AlphaTech Equities\nConclusion: We see Snapchat in the elite list of trillion-dollar companies club in the medium to long term\n\nWe initiate coverage of SNAP with A “Buy” rating and price target of $102, imputing an upside of 42.2% from its current share price.\nWe see a long runway for monetisation growth for SNAP underpinned by its recent successful investments in improving ROI for advertisers.\nWith 293m users worldwide, representing only a 4.7% penetration of global smartphone users vs 30.7% for Facebook, we see ample headroom for SNAP to grow its user base.\nWe see management’s multi-year revenue growth CAGR target of 50% as achievable driven by growth in DAU and accelerating ARPU.\nHowever, we closely monitor the risk posed by the latest iOS 14 IDFA which clipped the ability to track and retarget iOS users for advertising platforms such as SNAP.\nEven though valuation remains rich at 25x EV/REV 2022, we see this justified by SNAP’s best of breed growth profile.\nUnless the latest IDFA update from Apple dictates otherwise, we see SNAP continuing to punch strong growth numbers and see current share price as a good entry point for investors who missed the post-pandemic rally. We Initiate coverage on SNAP at \"Buy\".","kind":null,"is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":860974372,"gmtCreate":1632128838596,"gmtModify":1632802664200,"author":{"id":"3551655093075927","authorId":"3551655093075927","name":"KLS","avatar":"https://static.tigerbbs.com/60fe00969bbce4cfecf0d17a38c77628","vip":1,"crmLevel":4,"crmLevelSwitch":0,"idStr":"3551655093075927","authorIdStr":"3551655093075927"},"htmlText":"Buy","listText":"Buy","text":"Buy","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/860974372","repostId":1134680528,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":860971729,"gmtCreate":1632128185661,"gmtModify":1632802667236,"author":{"id":"3572467863337252","authorId":"3572467863337252","name":"Jaywei","avatar":"https://static.tigerbbs.com/beccce245458fd51f01db3fd362d9d9c","vip":1,"crmLevel":5,"crmLevelSwitch":0,"idStr":"3572467863337252","authorIdStr":"3572467863337252"},"htmlText":"Good luck&nbsp;","listText":"Good luck&nbsp;","text":"Good luck","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/860971729","repostId":1134680528,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5932279,"gmtCreate":1632128192785,"gmtModify":1634791442606,"authorId":3572467863337252,"author":{"id":3572467863337252,"idStr":"3572467863337252","authorId":3572467863337252,"name":"Jaywei","avatar":"https://static.tigerbbs.com/beccce245458fd51f01db3fd362d9d9c","vip":1,"crmLevel":5,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":860971729,"type":1,"supId":0,"prevId":0,"content":"Comment and like","text":"Comment and like","html":"Comment and like"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":69,"commentSize":2,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1134680528"}