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Snap's Turnaround Efforts Are Finally Paying Off

By Leo Sun - Updated Apr 25, 2019 at 10:05AM

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Snapchat's efforts to squeeze out more revenues per user with more ads and features are working.

Snap (SNAP -3.40%) is a battleground stock for the bulls and bears.

The bulls believe that Snapchat's niche is defensible, new features will expand its ecosystem, its losses are narrowing, and its growth in average revenue per user (ARPU) matters more than its growth in daily active users (DAUs).

The bears claim that it's only a matter of time before Facebook's (FB 1.39%) Instagram, which cloned most of Snapchat's popular features, renders the smaller app obsolete. They also claim that its cash burn rate is unsustainable and its valuation is too high.

A young woman in a hat and sunglasses takes a selfie.

Image source: Getty Images.

I was bearish on Snap after its IPO in March 2017, but I've warmed up to it in recent quarters as the company operating this popular multimedia messaging app addressed some of its most pressing issues and offered investors a clearer view of its future. Snap's first-quarter report on April 23 indicated that its turnaround was finally bearing fruit.

Snapchat's Gen Z users aren't going anywhere

Snap finished the quarter with 190 million DAUs, compared to 191 million a year earlier and 186 million in the fourth quarter. This indicates that Snap isn't bleeding users anymore -- which was a major concern in the second and third quarters of 2018:

DAU Growth

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019













Source: Snap quarterly reports.

Snapchat remains overwhelmingly popular with younger users. The company claims that it now reaches 90% of all 13- to 24-year-olds and 75% of all 13- to 34-year-olds in the U.S. During the conference call, CEO Evan Spiegel stated that Snap's ads "can now reach more 13- to 34-year-olds than Instagram in the United States."

Piper Jaffray's latest "Taking Stock with Teens" survey, which polled 8,000 teens about their favorite brands, also ranked Snapchat as the top teen social network, with a 41% mindshare. Instagram ranked second with a 35% mindshare.

More ad impressions across an expanding ecosystem

Meanwhile, Snap's annual ARPU growth continued to accelerate, indicating that it was offsetting its slower DAU growth by squeezing out more revenues per user:


Q1 2018

Q2 2018

Q3 2018

Q4 2018

Q1 2019







Annual growth






Source: Snap quarterly reports.

Much of that growth can be attributed to higher-volume sales of cheaper automated ads. That strategy caused its average ad prices to decline 42% annually, but its total ad impressions surged 155%.

Its new Android app -- which is 25% smaller, 20% faster, and designed as a platform that lets developers add new features -- also lifted user engagement, with a 6% increase in users sending Snaps within the first week of the upgrade. New Snap Original shows and AR experiences are also locking users into Snapchat's expanding ecosystem.

Snapchat's Friendship Profile feature.

Snapchat's Friendship Profile feature. Image source: Snap.

Robust revenue growth and better financial discipline

Snap's revenue rose 39% annually to $320 million during the first quarter, clearing estimates by about $14 million. It expects its revenue to rise 28% to 37% annually in the second quarter, which matches analysts' expectations for 32% growth.

Snap narrowed its net loss from $386 million a year ago to $310 million, and its adjusted EBITDA loss narrowed from $218 million to $123 million. Its non-GAAP net loss of $0.10 per share topped estimates by $0.02.

Snap remains deep in the red, but its narrowing losses show it can expand its ecosystem without breaking the bank. Its total costs and expenses rose just 2% annually to $636 million. Snap reported a negative free cash flow (FCF) of $78 million, but that was also a significant improvement from its negative FCF of $268 million a year ago.

Snap finished the quarter with $246 million in cash and equivalents, down from $387 million at the end of 2018. However, it still holds $963 million in marketable securities, and it hasn't taken on any debt or launched a secondary offering yet. Therefore, Snap's cash might dry up before it becomes profitable, but it still has other options on the table.

Mind the valuation

Snap's business is stabilizing and its plans for the future are clearer, but there might be too much optimism baked into the stock. Snap already rallied about 120% this year, and it trades at 10 times this year's sales. Facebook, which is firmly profitable, trades at less than 8 times this year's sales.

I admire Snap's turnaround efforts, and I don't think that it will be crushed by Instagram. However, I wouldn't start a position in this stock unless the price cools off a bit.

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