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Investing.com -- Snap Inc (NYSE:SNAP)., a U.S.-based technology, media, and communications company, has proposed to issue $700 million of senior unsecured notes due 2033. The company intends to use the proceeds from the issuance to prepay a portion of its existing convertible senior notes and for other general corporate purposes. S&P Global Ratings has assigned a ’B+’ issuer credit rating to Snap Inc., along with a ’B+’ issue-level rating and ’3’ recovery rating to the proposed notes.
The ’B+’ issuer credit rating reflects Snap’s significant competition within the media and communications industry, with relatively low barriers to entry and lagging monetization of its user base, especially in the U.S. This rating is balanced by Snap’s strong brand recognition, large active user base, and exposure to digital advertising industry tailwinds. Snap also holds strong liquidity with about $3.4 billion in cash and marketable securities.
Snap’s user base faces stiff competition from other platforms such as Meta (NASDAQ:META), TikTok, Reddit, and Pinterest (NYSE:PINS). These platforms, particularly Meta, possess greater financial resources that allow them to adapt to changing trends quicker and invest more in emerging technologies like generative AI and machine learning. Snap’s U.S. user base has remained flat over the past three years at about 100 million daily active users, with growth primarily coming from outside the U.S.
Snap derives 90%-95% of its revenue from digital advertising, which is highly cyclical but offers greater capabilities to target customers compared to traditional advertising media. Snap has made a concentrated effort to grow its performance-driven direct-response advertising over the last few years, reversing its previous greater exposure to brand advertising.
S&P Global Ratings expects Snap’s leverage to improve toward mid-5x and free operating cash flow (FOCF) to debt to 9% by the end of 2025. The company is predicted to generate around $750 million in adjusted EBITDA and $290 million of reported FOCF in 2025, significantly improved from 2024 levels. This growth is expected to be driven by increased market penetration outside the U.S. and increased monetization opportunities following the retooling of its ad platform.
Snap’s strong brand equity and growth opportunities are recognized, with a strong focus on reaching users between the ages of 18 and 34. Despite flat user growth in the U.S., its international user base has grown nearly 60% over the past three years. The company’s subscription product, Snapchat+, and its augmented reality hardware, such as its spectacles eyewear, are also expected to support growth.
However, changes to data privacy and technology remain a key risk for Snap. The company experienced a significant drop in EBITDA in 2022 and 2023 when Apple’s app tracking transparency (ATT) update imposed heightened restrictions on its access and use of user data. Future changes in data privacy or technology could pressure the company’s operations or profitability.
S&P Global Ratings could lower the rating on Snap if its FOCF to debt coverage declines below 5% on a sustained basis or its cash and marketable securities position falls below $3 billion. This could occur due to intensified competition, deteriorating macroeconomic conditions, changes in data privacy or regulation, or if management adopts a more aggressive financial policy. Conversely, the ratings could be raised if Snap maintains leverage below 4.5x, FOCF to debt above 10%, and continues to expand its EBITDA margins through growing its user base and improving user monetization.
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