What happened
Shares of Snapchat parent Snap (SNAP 0.95%) were soaring Friday morning, up as much as 54.9% at one point before settling into a 45% gain as of this writing. Of course, the stock had fallen more than 20% yesterday, in sympathy with other social media stocks, amid lackluster earnings from a certain large peer.
However, Snap defied expectations, smashing revenue and earnings expectations and giving strong guidance.
Image source: Getty Images.
So what
For the fourth quarter, Snap reported sizzling 42% revenue growth to nearly $1.3 billion, much more than the $1.2 billion expected. Meanwhile, while Snap has long garnered hefty net losses, adjusted (non-GAAP) earnings per share came in at a positive $0.22 vs. expectations of just $0.10.
Fears have abounded in recent months around the effects of changes to the iOS operating system, which would increase privacy protections but make it harder to track users across the internet, therefore making targeted advertising used by social media companies less, well, targeted. More imprecise ads are unlikely to garner the prices of hypertargeted ads.
However, Snap's growth managed to outpace those pricing headwinds. Daily users grew at a brisk 20% pace, led by the "rest of world" segment, which saw users grow 41%. And average revenue per user (ARPU) even grew in spite of increased privacy protections, up 18% overall, led by 30%-plus increases in pricing in both the U.S. and Europe.
Q4 also capped off the first year in which Snap earned positive non-GAAP income (although GAAP income was still negative, thanks to stock-based compensation) and positive free cash flow.
Now what
Amid today's surge, Snap shares have snapped back into the high 30s per share, a vast improvement from yesterday but still far, far below the all-time high of $83.34 they reached last summer.
So does that make Snap a bargain still, or have shares run too fast? At today's market cap of around $76 billion, they're selling at about 19 times 2021 sales. That's not exactly cheap. In addition, while the company points to adjusted earnings and free cash flow, management usually ignores the massive amount of stock-based compensation it pays its executives and employees. Last year, that amounted to nearly $1.1 billion, up 42%. That dilution is a real cost to shareholders.
Obviously, Snap has impressed with its execution in the face of opposition and doubters, and it is adding users fast. If you think Snap can continue to compound users and ARPU at these rates, it could be a buy. But given the rise in inflation and interest rates, Snap still looks risky to me. If it logs a quarter in which growth slows more than expected, the company could very well see a downdraft like yesterday's action. I'm interested in the stock, but still watching from the sidelines.
