Snap (SNAP -2.76%) has spent more than a decade burning cash in order to build a viable social network and technology business. The strategy was risky, and at times investors didn't know if the company would reach its goals.
We may have seen Snap turn the corner on Thursday after reporting the smallest of profits in the fourth quarter of 2021. Snap reported earnings of just a penny per share, but with users growing, revenue per user growing, and free cash flow now coming into the business, this may be a great growth stock long term.
A model looks through the augmented-reality-equipped Snap Spectacles 3. Image source: Snap.
Just keep building
I think it's worth taking a step back to think about Snap's business over the last few years. The company has often been compared to Meta Platforms (META 0.60%), its much larger, social network competitor that owns Facebook, Instagram, and WhatsApp. Looking at the free cash flow of the two businesses, it's easy to see why most people think Meta is crushing Snap; in many ways, that was true.
SNAP Free Cash Flow data by YCharts.
But as Meta grew, Snap continued to build its business steadily over time. The company invested in user content, built augmented reality (AR) filters and developer technology, and began building an advertising platform. But with 319 million users compared to 2.9 billion on Meta's apps, it was easy to see how far behind Snap was. That appears to be changing.
The tide is turning
The metrics for Snap are impressive across the board. Daily active users are up 20% to 319 million people, and revenue per user jumped 18% to $4.06 in the quarter.
One factor that's helping Snap is the fact that it's focused on brand advertisers, who are looking for awareness and attention rather than direct response ads, which need to be targeted and converted into sales. Brand advertising hasn't suffered because of Apple's app tracking changes, while direct response ads have, hurting Facebook.
Snap's results and trends are in sharp contrast to a social network like Facebook, which is seeing growth stagnate. It helps that Snap is in the advertising sweet spot right now, but it looks like users are moving to Snap, and that's bigger news long term.
Leverage is a key for Snap
What's key for Snap's stock long term is that costs don't just grow as fast, or faster, than revenue. What investors want to see is what's called operating leverage, which is when operating costs grow more slowly than revenue, resulting in a disproportionate amount of revenue flowing to the bottom line.
Snap said operating expenses as a percentage of revenue fell from 41% a year ago to 34% in the fourth quarter of 2021, which is a big reason the company was able to report $23 million in net income and $161 million of free cash flow.
Operating expenses have been flat over the last three quarters, and if Snap can continue to grow without adding too much in cost, the company could be a great cash-flow generator long term.
Snap has turned a corner
Social networks are in a battle for users' attention, and that's where I think Snap is winning right now. The company has a great product and interesting technology that is captivating to users. We're seeing that people value what Snap is building through the growing user base and advertising revenue.
Now that Snap is profitable, the sky is the limit for this company. This could be a great growth stock for another decade, especially if it becomes an AR leader. I, for one, am excited about Snap's future.
