The social media market is tricky, with a few big companies and ever-changing trends. Despite this, some companies have managed to establish themselves well and create a profitable business model, such as Meta (NASDAQ:META) Platforms Inc. (NASDAQ:META), and some incumbents that have conquered more niche spaces, such as Reddit Inc. (NYSE:RDDT), Pinterest (NYSE:PINS), and Snap Inc (NYSE:NYSE:SNAP), which will be the focus of this analysis.
Among the factors that make Snapchat's thesis stand out in relation to the other players is that although the company has maintained good operational indicators and initiatives, which improve the outlook the stock has shown significant falls, increasing the asymmetry.
Snapchat's Position in a Competitive Social Media EcosystemBecause it is a social network with less niche appeal than Reddit and Pinterest, and at the same time much smaller and less diverse than Meta, Snapchat may initially appear to have a weaker moat and may be more at the mercy of the competition. And this is partly true.
Snapchat has direct competitors. Messaging apps with similar functionalities, such as stories and filters, are not that uncommon, like WhatsApp and Instagram, which both are Meta apps and even others like Telegram.
This factor of being focused on messages and other more ephemeral content is also another difficulty of the business model, since long-term content, which is perennial, ends up becoming more valuable. Good examples are Reddit and Pinterest, which have managed to create a business model and communities through this.
These characteristics end up making Snap less differentiated, and consequently, a less wide moat compared to the other three companies listed and which serves as a good comparative basis for the thesis.
Even so, there are still market factors that can boost Snapchat. Among them is ad spending on social media, which Statista estimates will grow at a CAGR of more than almost 11% until 2029. In addition, Snap is present in several other trends that could unlock value over time, such as augmented reality/virtual reality, new partnerships, spotlight, increased relevance of privacy, international expansion, and the like.
Source: Statista
Snapchat's Growth Drivers and Revenue PotentialDespite the challenges, Snapchat is already a success story. The company managed to surpass the 443 million DAUs mark in Q3 and with some impressive figures, such as a 9% YoY growth in DAUs, 25% in total time spent watching content, more than 20% growth in spotlight, and the like.
This great social network was built through a good vision, with pioneering in some features, innovation in communication, great content partnerships, and a focus on young audiences. This growth story is reflected in its financials. Revenue has shown attractive growth most of the time, along with the operating margin, which although still in the negative (TTM), is already indicating something close to positive. It's worth mentioning that the Free Cash Flow per share is already positive, which is interesting as it mitigates the need for capital via debt, but the reason is that the SBC is relatively high, putting pressure on value creation by diluting the shareholder more steadily.
Source: GuruFocus
There are some reasons to believe that both revenue and margin can continue to expand. The main one is the Snapchat+ service, which recently reached 12 million subscribers and costs around $4/m. With many services that can be included in this subscription, adding more value for the user and consequently being able to expand the price over time, and with more users, this service could add billions in revenue for Snapchat in a few years' time.
If the company manages to charge around $5 a month from each user in a few years' time and reaches 10% of DAUs, which would be equivalent to 40 million users, the subscription revenue would be $2.4bn. That would be a huge addition to the company's $5.2bn revenue over the last few TTMs. Of course, it may take some time for Snapchat to reach this figure, but it seems possible in the medium term, given the company's good initiatives.
In addition to Snapchat+, there are other optionalities that support the consolidation and growth of the thesis, such as Spotlight, the growth of partnerships and e-commerce, augmented reality, and others such as international expansion. Global DAUs exceed 400 million, and the North American region is 100 million, still very representative, but with stagnant progress. Meanwhile, Europe showed growth of 4% YoY, and the rest of the world exceeded 16%. One of Snap's strengths is its young audience, and the demographic dynamics of emerging countries could be a force for boosting DAUs in the rest of the world region. Not only that, but North America, despite being around 25% of users, is responsible for more than 60% of revenue, so there is room to monetize the other regions through ads, partnerships, and also subscription services (subscribers).
These moves are not only capable of sustaining an expansion in revenue, but it is also possible to envision an expansion in margin. The main reason is scale, which should be able to have a positive impact as the company advances in revenue enough to cover costs that are not so scalable, given the good business model that is also asset-light. Apart from scale (especially in emerging markets), it is possible to consider future efficiency optimizations, but mainly the maturing of some businesses, such as better monetization of some services, adding more value for subscribers with new features, and consequently a more premium revenue mix.
Snap's Revenue Could Surpass $7bn by 2026According to the market forecast, Snapchat's revenue could reach around $6.8bn by 2026, with a net income margin of 15.7%, which would result in a P/E of 17.5x. This result seems quite plausible, with Snap even being able to beat estimates, especially on the revenue side. As mentioned, only with Snapchat+, it is possible to envision an addition of more than $2bn in the medium term, already resulting in revenue of more than $7bn.
Considering the addition of around $2.4bn, it seems quite possible that by mid-2026 or 2027 Snapchat will reach a revenue of $7.6bn. To reach a price-to-earnings of 20.7x in that period, a net income margin of 12% would be needed, and any incremental additions from scale gains and the like could result in an even more attractive multiple. 16% margin would already be around 15.5x earnings.
Although there are the risks mentioned, a scenario where the company achieves these numbers seems likely and could be characterized as a base case. That said, more optimistic scenarios could emerge, with the market re-evaluating the company and seeing that it is capable of delivering growth and profitability, which could also lead to an expansion in multiples. Even if this doesn't happen in 2026/2027, Snapchat should still have plenty of room for growth through emerging markets and improving its revenue mix.
Peer comparison is also a way of saying that Snap is attractive. Its EV-to-Revenue stands at 3.87x, while peers like Reddit and Meta reach 26.1x and 9.9x, evidencing a certain market disbelief in Snap's future profitability. In contrast, Reddit is trading at over 26x, with the market much more confident in revenue growth and margin expansion.
Source: GuruFocus
The forward price-to-earnings is also interesting, sitting at 27x, just above Meta, but with much more growth potential. But overall it's a more complex comparison, with the companies at very different stages of profitability.
Source: GuruFocus
Summing up the section, Snap's current valuation looks pretty attractive when combined with a consistent growth story.
The Bottom LineGiven the information above, Snap's thesis ends up being a little more unpredictable due to its risks. Still, its attractive valuation and a convincing plan to expand its margin and build an even bigger revenue make the social network an interesting and asymmetrical choice in this market.
This content was originally published on Gurufocus.com
