Snap (SNAP 1.61%) posted its first-quarter earnings report on April 21. The social media company's revenue rose 38% year over year to $1.06 billion but narrowly missed analysts' expectations by $10 million.
On a generally accepted accounting principles (GAAP) basis, Snap's net loss widened from $286.9 million to $359.6 million. On a non-GAAP basis, it posted a net loss of $39.3 million, compared to a net profit of $2.5 million a year ago, as its non-GAAP net loss of $0.02 per share came in three cents below the consensus forecast. However, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) stayed in the black at $64.5 million, which improved significantly from a loss of $1.7 million a year ago.
Image source: Getty Images.
Those headline numbers were mixed, but Snap's shares held steady after the report. Could this beaten-down growth stock finally be worth buying again after being cut in half over the past 12 months?
Snap's growth is cooling off again
Snap's daily active users (DAUs) grew 18% year over year to 332 million in the first quarter, which ended a five-quarter streak of 20% or better growth. However, its DAUs still rose sequentially and year over year across all three of its geographic regions (North America, Europe, and Rest of World) and easily surpassed its own guidance for 328-330 million DAUs.
Its average revenue per user (ARPU) increased 17% year over year to $3.20, but that also represented a slowdown from its previous quarters.
|
Growth (YOY) |
Q1 2021 |
Q2 2021 |
Q3 2021 |
Q4 2021 |
Q1 2022 |
|---|---|---|---|---|---|
|
DAUs |
22% |
23% |
23% |
20% |
18% |
|
ARPU |
36% |
76% |
28% |
18% |
17% |
|
Revenue |
66% |
116% |
57% |
42% |
38% |
Data source: Snap. YOY = Year over year.
In the second quarter, Snap expects to reach 343-345 million DAUs, which would represent 17%-18% growth from a year earlier. It expects its revenue to increase 20%-25% year over year.
However, analysts had expected Snap's revenue to rise 44% in the second quarter and grow 37% for the full year. Those estimates were likely based on Snap's investor day presentation last February, when it boldly claimed it would grow its annual revenue by about 50% for "the next several years."
Is Snap's slowdown temporary?
Snap hasn't walked back that ambitious long-term forecast yet, but three major headwinds throttled its growth over the past year.
First, Snap struggled with Apple's (AAPL 2.21%) iOS update in the second half of 2021. It addressed those challenges in the fourth quarter by deploying new ad-tracking services like Snap Pixel, but the update still throttled its full-year growth in ARPU and total revenue.
Second, Russia's invasion of Ukraine and the subsequent economic disruptions adversely affected Snap's advertising business. Those aftershocks could continue to curb the market's appetite for new ad campaigns.
Lastly, Snap faces tough competition from ByteDance's TikTok. Snap didn't directly address TikTok in its latest conference call -- as Meta Platforms (FB 3.77%) did in February -- but it repeatedly mentioned the expansion and monetization of Spotlight, its own short video competitor to TikTok, to address those concerns. Meta's aggressive expansion of Facebook and Instagram's short video features to compete against TikTok could result in more competition.
Snap's margins could keep declining
Snap's adjusted EBITDA margin of 6.1% in the first quarter represented a big improvement from its negative margin a year earlier, but it still marked a steep decline from its margin of 25.2% in the fourth quarter.
For the second quarter, it expects to generate $0 to $50 million in adjusted EBITDA. The midpoints of its revenue and adjusted EBITDA guidance imply its adjusted EBITDA margin will drop to about 2.1%.
Snap attributes that ongoing contraction to its rising headcount, higher marketing costs, and the return of travel and event-related expenses, which had temporarily declined during the pandemic. Those higher operating costs are offsetting the ongoing expansion of its gross margins, which have benefited from the increased scale of its cloud infrastructure.
NYSE: SNAP
Key Data Points
Is Snap's stock worth buying again?
Based on analysts' expectations, Snap's stock trades at eight times this year's sales. That seems like a low price-to-sales ratio for a company that told investors to expect 50% growth for the next few years. But as I mentioned earlier, Snap's recent slowdown indicates those estimates are too high.
But even if Snap's revenue only rises 25% to $5.15 billion this year, its stock would still be reasonably valued at nine times that estimate. Therefore, I believe Snap's downside potential is fairly limited at these levels.
Nevertheless, Snap's upside potential could still be limited by inflation, rising interest rates, and other macroeconomic shocks that are curbing the market's appetite for higher-growth tech stocks. In other words, Snap's stock won't sink -- but it certainly won't swim forward anytime soon.
Investors who believe Snapchat still has staying power as a major social media platform can accumulate some shares down here, but they shouldn't expect Snap to outperform the market over the next few quarters.
