Since Snap (SNAP -2.72%) launched its IPO, the stock has experienced many challenges. Initially, it did not meet the projection for growth in the number of users.
However, its performance eventually improved, and if not for the recent sell-off in tech stocks, Snap's stock performance might have come out ahead of the S&P 500. Snap has made changes to its business that make it worth considering, increasing the likelihood that the social media stock could beat the market over the next five years.
Image source: Getty Images.
What changed?
Initially, Snap's main platform, Snapchat, offered some intriguing features. Young people took to its filters and stories that disappeared after a short period. However, Meta's Facebook and Instagram copied many of these features. Moreover, Snap did not effectively drive revenue with Snapchat, and it held little appeal to those over 25.
Nonetheless, over time, it has learned lessons from these initial approaches. It finally monetized its platform through ads and offered proprietary content through Snapchat Originals.
It has also built on its augmented reality (AR) functionality. Apps and products such as Lens Studio, Spectacles, and AR Shopping have dramatically enhanced its appeal. CEO Evan Spiegel said on the Q1 2022 earnings call that users had created more than 2.5 million lenses. Additionally, engagement with those lenses more than doubled compared with the year-ago quarter.
Snap has also added partnerships with the likes of CNN, The Wall Street Journal, and News UK, explicitly targeting users above 25. Such offerings have helped increase engagement with Snapchatters who are 25 and older by 25% over the last 12 months.
In percentage terms, this exceeded the 12-month growth rate of 18% in daily active users (DAUs). Snap now claims 332 million DAUs. Admittedly, the company did not meet the optimistic predictions back in 2018. Nonetheless, the company should benefit from continued growth through at least 2025.
Data source: eMarketer.
Snap's financials
This approach continues to improve its financials. Its revenue in the first quarter of 2022 came in at just under $1.1 billion, 38% higher than in the year-ago quarter. While not as high as the 64% revenue growth for 2021, online engagement has generally fallen, as users have not been on lockdown as much.
Overall, lower engagement contributed to rising losses. Snap lost $360 million, 25% more than in the first quarter of 2021. Research and development costs and expenses for sales and marketing increased faster than revenue during that time. The company also logged $78 million in losses tied to activities such as strategic investments, currency transactions, or impairment losses.
However, Snap looks poised to maintain a high level of revenue growth. Though the company predicted 20% to 25% revenue growth in the overall quarter, analyst projections point to revenue increases of 37% for the year.
Still, the company's adjusted EBITDA forecast may point to continuing challenges regarding expenses. Snap expects adjusted EBITDA in Q2 to come in between breakeven and $50 million. While that is a wide variance, adjusted EBITDA was $64 million in Q1, indicating that expenses will probably remain elevated.
Despite these projections, Snap stock has fallen by almost 65% from its 52-week high. This has taken its price-to-sales (P/S) ratio to 10.8. While that is its lowest level in about two years, it remains pricier than Twitter and Pinterest, which sell for 8.5 and 5.2 times sales, respectively.
Regardless, it has grown its user base at a time when Twitter stock has struggled to gain traction, and Pinterest reels from a decline in MAUs. Such outperformance could make Snap stock worth the higher cost.
So, where will Snap be in five years?
Although anything can happen over a five-year time frame, Snap appears well-positioned to outperform the market. Now that it has figured out how to monetize its site and compete with the much-larger Meta, it should continue to grow its user base and gain a more significant following with older users.
Moreover, analysts predict an annual earnings growth rate of 68% over the next five years. While that is an early prediction they will likely revise over time, its user growth and the substantially discounted stock price point to Snap's potential as a lucrative long-term investment.
