It's no secret that the digital advertising market is deflating, and Snap's (SNAP -1.14%) recent earnings report surely let even more air out of its balloon. After Snap posted second-quarter results on July 21, share prices of the social media company (best known for its app Snapchat) plunged more than 35%. The stock is down 78% year to date.
The earnings news wasn't a total surprise. Snap management issued guidance on May 23 stating the company would report both revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) below its previous Q2 2022 guidance, due to a macroeconomic environment that has "deteriorated further and faster than anticipated."
Snap isn't alone in its sell-off woes. The Nasdaq Composite has cratered 19% since the start of the year as technology stocks as a whole continue to be slowed by macroeconomic headwinds. But after Snap's latest collapse, some investors are wondering if the social media company will ever recover. Let's explore the company's current financial position and see if we can find an answer.
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Snap's business has hit a roadblock (again)
Snap's Q2 overall sales increased 13.1% year over year to $1.1 billion, finishing slightly below Wall Street estimates. But its net loss of $422.1 million, a much greater loss than its negative net income of $151.7 million a year ago, seemed to bother investors the most. Likewise, its average daily active users (DAU) rose 18.4% to 347 million, but its average revenue per user (ARPU) declined 4.5% to $3.20.
CEO Evan Spiegel stated that the company's Q2 results "do not reflect [Snap's] ambition," and it plans to foster new sources of revenue in order to "diversify [its] top line." As of now, the social media enterprise generates almost all of its revenue via advertising, which has been difficult to obtain as the economy has slowed in 2022.
Recently, the company rolled out Snapchat+, a $3.99-per-month subscription service that offers users exclusive and pre-release features. It'll be interesting to watch this venture play out, but even if it proves to be a solid moneymaker, we aren't likely to see material results in earnings reports for quite some time.
Inconsistency and added debt exacerbate the situation
What investors should worry about the most right now is Snap's inability to consistently generate a positive bottom line. On the basis of generally accepted accounting principles (GAAP), Snap has yet to put together four straight quarters of profitability. This is a major red flag, especially considering the downward trend of its business at the moment.
It also doesn't help that the social media platform is more leveraged than ever before -- as of Q2, the company had a long-term debt position of $4.2 billion, well above its five-year average debt level of $1.2 billion. As a result, its debt-to-equity ratio has jumped to 122.1%, which may not indicate horrible leverage, but is much higher than its historical mean of 42%.
Should you buy Snap stock right now?
I wouldn't recommend that investors buy Snap today. Even though it's currently trading at 3.4 times sales, markedly below its five-year mean price-to-sales multiple of 20.3, the stock carries far too much risk at the moment. With intense competition in a pressured digital ad market, lack of net profits, and increased leverage, the company displays too many red flag's to justify buying. I think it's best to stay on the sidelines for now.
