Snap (SNAP 27.63%), the parent company of Snapchat, took investors on a wild ride after it went public at $17 per share on March 2, 2017. The stock opened at $24, but tumbled over the following two years and sank below $5 a share in December 2018. But the bulls eventually rushed back, and Snap's stock closed at an all-time high of $83.11 last September.
Today, Snap's stock trades at about $15 again. Therefore, a $1,000 investment in its IPO would be worth less than $900 today. Let's see why Snap's stock collapsed -- and if it will ever recover.
Image source: Getty Images.
Why Snap lost its luster after its IPO
Snap was valued at about $33 billion, or 40 times the sales it would generate in 2017, at the end of its first trading day. That was a nosebleed valuation for an unprofitable underdog in the social networking market, but the bulls believed its growth rates justified its frothy price-to-sales ratio.
However, Snap's sequential growth in daily active users (DAUs) stalled out in 2018 as Meta Platforms (META 0.43%) -- then known as Facebook -- aggressively expanded its ephemeral "Stories" for Facebook and Instagram to challenge Snapchat.
Between the first and fourth quarters of 2018, Snapchat's DAUs declined from 191 million to 186 million, and the bears were convinced it would be rendered obsolete by Facebook and Instagram Stories.
Snap's revenue still rose 43% year over year to $1.18 billion in 2018, but that represented a significant deceleration from its 104% growth in 2017. It also racked up a whopping net loss of $1.26 billion.
That slowing growth and red ink suggested Snap didn't actually deserve to trade at a double-digit price-to-sales ratio -- so its stock price plummeted.
How Snap became a growth stock again
Snap's future looked bleak at the end of 2018, but the situation started to improve throughout 2019 as it expanded its ecosystem with new short videos, augmented reality (AR) lenses, and games. It also remained the favorite social media platform for teen users in the U.S., according to Piper Sandler's biannual "Taking Stock with Teens" surveys.
Between the first and fourth quarters of 2019, Snapchat's DAUs increased from 190 million to 218 million. That figure hit 265 million at the end of 2020 and rose to 319 million at the end of 2021. Its revenue grew 39% in 2019, 46% in 2020, and 64% to $4.12 billion in 2021. That accelerating growth convinced the bulls to fall in love with Snap's stock again.
Last February, Snap fanned those flames by claiming it could continue to generate 50% annual revenue growth for "multiple years." As a result, its market cap ballooned to $131 billion -- or 32 times its 2021 sales -- at its all-time high last September.
Why Snap's stock crashed again
Snap's subsequent crash was caused by three main factors. First, it underestimated the impact of Apple's (AAPL -0.35%) privacy update on iOS, which allowed its users to opt out of data-tracking features. That miscalculation throttled its revenue growth in the second half of 2021.
Second, it underestimated the macroeconomic headwinds for the advertising sector. In April, it predicted its second-quarter revenue would rise 20%-25% year over year as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 57%-100%.
That outlook was already grim, but Snap revised that forecast in late May and said its revenue and adjusted EBITDA would both come in below the lowest end of its earlier guidance because the "macroeconomic environment" had "deteriorated further and faster than anticipated."
Lastly, Snap's slowing growth, lack of profits, and high price-to-sales ratio made it an unappealing stock to own as rising interest rates drove investors toward more conservative investments. That's probably why Snap's insiders sold nearly 13 times as many shares as they bought over the past 12 months.
Will Snap's stock bounce back?
Snapchat is still growing. It ended its first quarter with 332 million DAUs, and it expects to reach 343-345 million DAUs in the second quarter. The stock also looks a lot more reasonably valued now at five times this year's sales.
However, Snap still faces intense competition from Instagram and ByteDance's TikTok, which notably surpassed Snapchat as the favorite social media platform for U.S. teens in Piper Sandler's latest survey, and the macroeconomic headwinds for the ad industry won't wane anytime soon.
Unless Snap stabilizes its top-line growth and starts to narrow its losses on a generally accepted accounting principles (GAAP) basis, I believe it will remain in the penalty box in this challenging market for growth stocks. Therefore, investors should keep an eye on Snap, but they shouldn't rush to buy it when more resilient tech stocks are still on sale.
