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5 Reasons to Buy Snap’s Stock After Its Post-Earnings Plunge

By Leo Sun - Feb 5, 2020 at 10:00AM

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Snap’s surging revenue, accelerating user growth, and expanding ecosystem all suggest the stock still has room to run.

Snap's (SNAP 2.00%) stock recently tumbled after the social media company posted mixed fourth-quarter numbers. Its revenue rose 44% annually to $560.9 million but missed expectations by about $1 million. Its net loss also widened from $191.7 million to $240.7 million, mainly due to high stock-based compensation expenses.

However, Snap's adjusted EBITDA, which excludes its stock-based compensation expenses, came in at $42.3 million, marking a big improvement from its loss of $50.4 million a year earlier. That translated to non-GAAP earnings of $0.03 per share, which beat expectations by two cents.

Snap's report wasn't disastrous, but it clearly spooked the bulls and attracted the bears. But upon taking a closer look at the results, I believe Snap's strengths still outweigh its weaknesses, for five simple reasons.

Two young girls take a selfie.

Image source: Getty Images.

1. Its user growth is still accelerating

Snapchat's total daily active users (DAUs) grew 4% sequentially and 17% annually to 218 million during the fourth quarter. Both growth rates represented an acceleration from the third quarter, and indicate that the app is still attracting new users.

DAU growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Sequential

0%

2%

7%

3%

4%

Annual

0%

(1%)

8%

13%

17%

Source: Snap quarterly reports.

2. It's gaining overseas users

Snapchat's DAUs also grew sequentially and annually across all three global regions, with overseas markets leading the charge. Its annual DAU growth rate also accelerated across all three regions.

Region

DAUs (Q4 2019)

Sequential growth

Annual growth

North America

86 million

2%

9%

Europe

67 million

3%

12%

Rest of World

64 million

5%

36%

Source: Snap quarterly reports.

That balanced growth indicates that Snapchat isn't losing significant ground to Facebook's (META -1.19%) Instagram and ByteDance's TikTok, and it shows that there's still plenty of room for all three teen-oriented apps to grow without trampling each other. Snap mainly attributed its user growth to investments in new features for Snapchat and the redesign of its Android app. 

3. New features generate stronger ARPU growth

Meanwhile, Snapchat's new features -- which include AR lenses and filters, games, Discover videos, Scan visual searches, and Bitmoji TV (which puts users' Bitmoji avatars into cartoon series) -- are lifting Snap's average revenue per user (ARPU) across the world.

Region

ARPU (Q4 2019)

Sequential growth

Annual growth

North America

$4.42

18%

31%

Europe

$1.37

30%

31%

Rest of World

$1.35

34%

9%

Total

$2.58

22%

23%

Source: Snap quarterly reports.

4. Its expanding ecosystem

Snap's ARPU should continue rising as its video ecosystem expands. During the quarter, the total daily time spent by Snapchatters watching its Discover content rose 35% annually. Within that group, users over the age of 25 spent 60% more time watching content daily, which indicates that it's locking in older users.

Snap stated that over 10 million viewers were watching over 50 Discover shows monthly. It also launched 78 new international Discover channels during the fourth quarter, up from 53 new channels in the third quarter, to bolster its overseas presence.

Two Snapchatters playing a Bitmoji game.

Image source: Snap.

New features like personalized Bitmojis and AR lenses are also gaining steam. Roughly 125 million Snapchatters have watched Bitmoji Stories since the personalized comics feature launched in late 2018, and a growing number of in-app games support the virtual avatars.

75% of Snap's users now use Snapchat's AR features daily, and the company recently convinced Coca-Cola and McDonald's to develop AR experiences for users, who scan their logos with Snapchat's camera. Those experiments could pave the way for new advertising experiences and further differentiate its platform from Instagram and Tik Tok. To widen its moat against both rivals, Snap recently introduced Cameos, a creative tool that helps Snapchatters create short videos.

5. Improving cash flow and solid guidance

Snap generated a negative free cash flow of $75.9 million during the quarter, but that marked a significant improvement from a negative FCF of $148.8 million a year ago.

Snap also offered a solid outlook for the first quarter. It expects its revenue to rise 41%-47% annually, which matches analysts' expectations for 44% growth. It expects its adjusted EBITDA to come in between negative $70 million and $90 million, compared to a loss of $123 million a year earlier.

The key takeaways

Snap still faces tough competition from Instagram and TikTok, and it won't achieve profitability anytime soon. However, Snapchat's user growth is accelerating, its ARPU is rising worldwide, and its new features are increasing the stickiness of its ecosystem. It's losing money, but it's still sitting on $520 million in cash and $1.59 billion in marketable securities -- so it isn't in any significant danger yet.

Snap's stock still isn't cheap at about 11 times next year's sales, but its rising revenue and long-term growth potential could justify that premium valuation. Therefore, its post-earnings dip could represent a good time to accumulate more shares.

 

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Facebook and Snap Inc. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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Snap Inc. Stock Quote
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