Snap to Focus on Increasing Efficiency and Long-Term Profitability; FVE to $27; Shares Undervalued

Snap disclosed its restructuring plan today, from which we had a few takeaways. First, we are pleased that management is prioritizing investments in Snap's core capabilities to generate free cash flow and profitability over investments in products that have high uncertainty regarding their growth and overall contribution to the top and bottom lines in the short and long term. Second, such prioritization is indicative of continuing maturity of the management team, mainly the co-founder and CEO Evan Spiegel, which increases our confidence in Snap not only hitting GAAP profitability but also maintaining it with improved capital allocation, benefiting shareholders in the long run. And third, the firm's third-quarter revenue update, which was above the FactSet consensus estimates, implies that Snap is improving its ad measurement tools, which likely are stabilizing advertising demand. However, this may be offset by continuing uncertainty in the macro environment and competition not only from Instagram but also TikTok, all of which could pressure ad spending on the platform. For this reason, we lowered our projections, resulting in a $27 fair value estimate, down from $30. While no-moat Snap is still attractive at current levels, our preferred names in this space remain wide-moat companies Alphabet and Meta.