There's no doubt social media can be a lucrative business model. Look at Meta Platforms, which generates billions of dollars in annual earnings. It shows the potential and promise of Snap (SNAP 27.63%), the company behind the media-focused messenger app Snapchat.
But Snap has struggled to replicate Meta's success, and shares are down almost 90% from their all-time high. The good news is the app continues to pick up new users, which stood out in the company's recent Q4 earnings.
So is it time to buy? Here's what you need to know before making a decision.
The good: Global user growth is strong
A social media network generally provides users free access and monetizes them through ads and subscriptions. In other words, increasing users is an excellent indicator of future revenue growth. Snap has excelled at growing its user base as global daily active users increased 10% year over year to 414 million by the end of 2023.
Additionally, Snap is competitive when it comes to capturing the attention of young users, who are the future economy's prime consumers. Approximately 63% of Generation Z individuals use Snapchat, coming in just shy of TikTok, according to a study by Morning Consult.
Notably, there's still a tremendous growth runway ahead for Snap. Over 3 billion people are using Meta's family of apps each day, which shows there's realistic potential for Snap to double its user base (or better) over time.
The bad: North American growth is lagging
It's not all good news, though. Unfortunately, Snap's user growth has stagnated in its most important market -- North America -- which currently has 100 million users.
The problem? That number hasn't grown in a while. Snap ended 2021 with 97 million users in North America, so that's just a cumulative 3 million user increase over the past two years. Meta's Facebook grew its U.S. and Canadian daily active users from 195 million to 205 million over the same two-year period. That's an increase of 10 million despite Facebook being a far more mature platform.
North American users are the most profitable users by a wide margin. Snap generated $900 million in Q4 revenue from North America. That's 66% of its revenue from one-quarter of its user base. And stagnation in North America feeds into Snap's broader problem ...
Image source: Getty Images
The ugly: Snap can't monetize its users well enough
Snap is struggling to generate revenue from its users, which is the company's true Achilles' heel. Snap's average revenue per user (ARPU) declined 5% year over year to $3.29 in Q4. The reason? Snap's user growth comes from outside North America, and the users outside North America contribute less revenue. This is common to most major social media companies.
Ideally, Snap offsets this drag by getting more out of North American users. However, it's not doing that. Snap's ARPU for North American users grew just 2% in Q4 to $8.96. How bad is Snap underperforming here? Meta's U.S. and Canadian users generated a whopping $68.44 on average last quarter, up over 16% year over year.
Snap has gotten creative in opening up new revenue streams. It sells a subscription service, Snapchat+, that gives users early access to new features and other perks. It currently has 7 million subscribers, but it's hard to see that service appealing to those who aren't power users.
Is it time to buy Snap?
The numbers clearly show Snap isn't executing as well as Meta. That alone isn't a deal breaker, but it's an issue when the company isn't even making money. Snap's operating margin was negative 18% in Q4, and the business reported a $248 million net loss.
These results show that Snap likely has a long journey to becoming profitable, and the North American market isn't something investors can hang their hopes on given its struggling growth. Investors are better off avoiding the stock until some concrete progress is shown in the quarterly numbers. Until then, Snap seems cheap for a reason.
