The market liked what it saw in Snap's (NYSE:SNAP) fourth-quarter report on Tuesday. The company behind Snapchat managed to keep its user base steady, and it moved "substantially closer to achieving profitability," in the words of CEO Evan Spiegel.

Snap did improve its bottom line in the fourth quarter, but the company is still posting gigantic losses. Its profitability went from astoundingly terrible to only extremely terrible, a shift that was apparently enough to warrant a big rally Wednesday morning. That's how far expectations have fallen for this formerly hyped-up stock.

Money on fire.

Image source: Getty Images.

Moving in the right direction, but far from the goal

Snap managed to grow its fourth-quarter revenue by 36% year over year, despite a small loss in daily active users. DAUs were 186 million in the quarter, down from 187 million in the prior-year period and flat from the third quarter.

This growth was driven by progress boosting the average revenue per user. Snap generated $2.09 of revenue for each of its users in the fourth quarter, up 37% year over year. Ad products like six-second video ads and newly launched product catalogs helped the cause.

Snap was able to grow revenue without substantially increasing its cost of revenue. Snap uses third-party cloud providers for all its infrastructure, so infrastructure costs will generally scale with usage. But Snap's engineering efficiency programs have been chipping away at its cloud infrastructure costs. One successful initiative mentioned during the earnings call involves optimizing bandwidth usage on Snapchat.

Snap's gross margin was 45.4% in the fourth quarter, up from 33.1% in the prior-year period. That's an impressive improvement, but there's a limit to how much cloud infrastructure costs can be brought down. There's only so much low-hanging fruit.

All of that gross profit is still being wiped out by Snap's operating expenses, although the company did reduce costs in the fourth quarter. Total GAAP operating expenses were $371.6 million, down about 18.4% year over year. R&D took the biggest hit, with spending slashed by nearly 30%.

Snap posted a GAAP operating loss of $194.7 million in the fourth quarter, good for an operating margin of negative 50%. That's a big improvement over the $361.0 million operating loss in the fourth quarter of last year, but it's still awful in an absolute sense. Net loss was $191.7 million, or $0.14 per share.

Every other profitability metric was deeply negative as well. Operating cash flow was a loss of $126 million; free cash flow was a loss of $149 million; and adjusted EBITDA was a loss of $50 million. Adjusted EBITDA is at least close to turning positive, but that's a meaningless number that Snap has no business even reporting.

Check out the latest Snap earnings call transcript.

Here's an idea of how far Snap is from turning a profit: At the same gross margin and operating expenses, fourth-quarter revenue would have needed to have been about $430 million higher for operating profit to turn positive. In other words, Snap's revenue needs to be more than double what it is now.

Snap is growing revenue, reining in costs, and making its cloud infrastructure spending more efficient. But it's nowhere close to being profitable, and it may never reach that goal if it can't restart its user growth.