When Snap Inc. (NYSE:SNAP) reported its fourth-quarter results on Tuesday, all eyes were on revenue and user growth and the company didn't disappoint. Revenue soared 72% year over year, and the Snapchat app added 8.9 million new daily active users. The recent redesign of Snapchat seems to be paying off.

Venture away from the top-line numbers, though, and Snap's results should horrify investors who base their decisions on the fundamentals. GAAP net loss more than doubled as costs soared; free cash flow sank even deeper into the red; and even adjusted EBITDA, a mostly useless number that tech companies sometimes like to tout, went from bad to worse.

This is not what a good quarter looks like.

A woman wearing Snap Inc.'s Spectacles.

Image source: Snap Inc.

Massive, unrelenting losses

Snap grew its daily active user base by 18% year over year, and increased its revenue per user by 46% year over year. So it's clearly gotten more effective at gaining users and convincing companies to advertise on its platform.

But this progress didn't come cheap. Snap's costs exploded during the fourth quarter. Research and development costs rose 260% year over year. Sales and marketing costs jumped 119%. Also, general and administrative costs surged 67%. One bright spot was cost of revenue, which is mostly cloud infrastructure costs. Cost of revenue rose only 25%, substantially slower than revenue growth.

Overall, costs jumped 93% year over year, handily outpacing revenue growth and leading to some pretty dismal bottom-line numbers.


Q4 2017

Q4 2016

Operating income

($361.0 million)

($169.7 million)

Net income

($350.0 million)

($169.9 million)

Free cash flow

($197.3 million)

($188.1 million)

Adjusted EBITDA

($158.9 million)

($152.3 million)

Data source: Snap Inc.

For the full year, Snap's free cash flow was a loss of $819.2 million. The company burned that much cash to generate $824.9 million of revenue. With about $2 billion of cash on the balance sheet thanks to its IPO, Snap is in no danger of running out of cash anytime soon. But that burn rate is staggering nonetheless.

A reminder that the valuation is nuts

Shares of Snap jumped after its "good" results. The company is now valued at around $24 billion. That's nearly 30 times 2017 sales. There's no other ratio to calculate because every other number is negative.

Snap is priced like it's the second coming of Facebook. I can assure you it's not. Facebook was wildly profitable even when it was small. Snap isn't even in the ballpark.

Yes, revenue is growing fast. It doubled in 2017, and if the company can maintain its higher average revenue per user, the next few quarters could feature impressive revenue growth as well. But is that enough to justify a price-to-sales ratio of 30, especially considering the massive losses that come with this growth? I don't think so.

While fears of a stagnating user base are temporarily on ice, it remains to be seen whether Snap can continue adding users at such a brisk pace. If its momentum doesn't carry over into 2018, the stock could be in for another rough ride. And in the long run, if Snap doesn't start moving its bottom line in the right direction, the stock could easily crash 50% or more.