Snap's (SNAP +0.17%) stock skyrocketed 59% during after-hours trading on Feb. 3 after the social media company posted its fourth-quarter earnings. That rally reversed Snap's 24% decline during the regular trading session, which occurred after Meta Platform's (FB +1.81%) mixed fourth-quarter report and soft guidance torpedoed its smaller social media peers.
But even after Snap's post-earnings pop, its stock remains down 17% for the year and 53% below its all-time high of $83.34 from last September. Does Snap's fourth-quarter earnings beat make it a worthwhile investment again?
Image source: Getty Images.
How fast is Snap growing?
Snap's fourth-quarter revenue rose 42% year over year to $1.3 billion, which beat expectations by $100 million. Its daily active users (DAUs) grew 20% to 319 million, and its average revenue per user (ARPU) rose 18%.
All three growth rates decelerated from Snap's previous quarters, but the company still fared well against tough year-over-year comparisons:
|
Growth (YOY) |
Q4 2020 |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
|---|---|---|---|---|---|
|
Revenue |
62% |
66% |
116% |
57% |
42% |
|
DAUs |
22% |
22% |
23% |
23% |
20% |
|
ARPU |
33% |
36% |
76% |
28% |
18% |
Data source: Snap. YOY = Year-over-year. DAU = daily active user. ARPU = average revenue per user.
Back in October, Snap expected its revenue to only grow 28% to 32% year over year in the fourth quarter. At the time, Snap mainly blamed the slowdown on Apple's (AAPL +2.65%) privacy update on iOS, which enabled its users to opt out of data tracking features across all apps.
But during the fourth quarter, many of Snap's advertisers tweaked their advertising campaigns to cope with Apple's changes. Snap also continued to expand its first-party data and ad measurement platforms (such as Snap Pixel, a piece of data-tracking code) to reduce its dependence on third-party data and targeted ads, and rolled out multi-platform ads that enabled its advertisers to deploy a single set of ads across multiple ad formats. Snap also saw advertisers boost their overall spending on augmented reality ads.
Snap's average eCPM (effective cost per thousand impressions, or the average cost of its ads) increased 46% year over year in the fourth quarter, which indicates that Snapchat's popularity among younger users still gives it plenty of pricing power in the crowded advertising market.
For the first quarter, Snap expects its revenue to grow 34% to 40% year over year, which also exceeds analysts' expectations for 32% growth.
Snap turned in its first quarterly profit
On the bottom line, Snap generated a net profit of $22.5 million, which represented a significant improvement from a net loss of $113.1 million a year earlier. That marked its first quarterly profit on a generally accepted accounting principles (GAAP) basis as a public company.
However, a lot of that growth came from its investment portfolio and lower interest expenses related to its convertible notes. If we exclude those gains, Snap actually posted an operating loss of $25.1 million -- which still narrowed from its operating loss of $97.2 million a year earlier.
On a non-GAAP basis, Snap's net income soared 164% year over year to $359.5 million, or $0.22 per share, which crushed estimates by $0.12. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also increased 97% year-over-year to $326.8 million, which boosted its adjusted EBITDA margin from 18% to 25%.
Snap's margins expanded as it scaled up its cloud infrastructure, which reduced its infrastructure costs per DAU by 4% year over year, and dialed back the content acquisition costs for its Spotlight short video platform.
Snap's expanding margins and improving profitability also enabled it to generate its first full year of positive operating cash flow and free cash flow. Those milestones should silence the bears, who have repeatedly suggested that Snap would run out of money before it ever turned a profit.
But is it the right time to buy Snap?
Snap's earnings report look a lot better than Meta's, and it looks a lot more reasonably valued than it did last September. At $40 per share, Snap's stock trades at about eleven times its 2022 sales -- which seems fairly reasonable relative to analysts' expectations for 34% sales growth.
But Snap still isn't cheap at 75 times its non-GAAP earnings for 2022, and it probably won't stay consistently profitable on a GAAP basis yet -- its fourth-quarter net profit was boosted by one-time benefits. Nonetheless, Snap's margins should keep expanding, its GAAP losses should continue to narrow, and its non-GAAP profits will likely keep rising.
In a placid market, I'd heartily recommend Snap as a top growth stock. But in this volatile market for growth stocks, I'd only recommend nibbling on Snap over the next few months as the formidable macro headwinds continue to batter high-growth tech stocks with slim GAAP margins.
