Benchmark analyst Mark Zgutowicz reiterated a Hold rating on Snap Inc (NYSE: SNAP).
The analyst re-rated ahead of SNAP's 2Q earnings on July 25, still lacking revenue growth catalysts, including limited tangibles concerning its DR stack rebuild.
The stock's ~25% appreciation since its 1Q earnings release reflects a valuation realignment with ad tech's rebound on assumed 2H advertising stability, which the analyst doubts.
Net-net, SNAP's DR stack progression, and ultimate competitiveness remain elusive with his discussions in the industry and suggest an elongated return to revenue growth.
Further, TikTok is becoming more aggressive with new DR offerings, siphoning more near-term market share from SNAP and Meta Platforms Inc (NASDAQ: META).
And without revenue catalysts, the analyst believes management's loosened reins on FCF production (traded for product investment) may be walking the stock on a tightrope, which he hopes to gain greater clarity on from the call. SNAP's AI/ML investments push near-term FCF protection to the rearview.
SNAP faces challenging circumstances managing near-term P&L improvement with product investment, which does not improve its competitive positioning until longer-term.
The analyst estimate a -32% GAAP operating margin in FY23E, while its market share deprecates with a non-competitive DR stack.
In 1Q, SNAP laid out its investment priorities in order of magnitude: ML for rankings/optimization, ML for content engagement and AI chatbot.
In 2Q, these expenses are likely to add an incremental 8-10 cents to infrastructure (COGS) cost per DAU (deleveraging towards FY20 levels) and additional opex-related costs (e.g., ML engineers) with uncertain timing for payback.
The analyst suspect returns will not be visible until late FY23E or, more likely, FY24E. He expects SNAP to adjust investment based on efficacy to avoid falling behind a reasonable FCF trajectory.
The analyst's recent media buyers call suggests that while SNAP is making a concerted effort to address lower-funnel/DR objectives, it is "not there yet" competitively.
In addition, its agency label as an "AR company" that remains primarily "test and learn" places pressure on its ability to capture incremental budget.
And it does not help that TikTok is increasingly taking low-hanging DR budget as it steadily improves and adds new tracking tools combined with a highly engaged influencer network and top-tier creator programs.
The analyst continues to look for SNAP progression with recent hires like Ziggy Lin-previously head of product monetization at TikTok- and investment in product marketing where SNAP is outnumbered competitively.