Like its disappearing messages, Snap's (SNAP 2.89%) stock price at a given moment doesn't seem to last long.
Shares of the Snapchat parent have fallen nearly 90% from their peak last September, continuing a volatile streak since its 2017 IPO. The social media company has struggled recently as revenue growth has suddenly fallen after a pandemic boom. Management has blamed macroeconomic challenges, and most of its peers have seen slowing revenue growth as well.
However, Snap has a plan to get the stock moving in the right direction, announcing a slew of changes in an investor update on Wednesday to cut costs and put the company on a path to growing profits. Foremost among those moves is that it's cutting 20% of its staff.
The company is also paring back overhead costs like real estate. It's lowering its marketing spending, relying more on organic marketing, and it will continue to focus on making its infrastructure costs more efficient. Altogether, it expects to reduce annual cash expenses by $500 million.
Management also said that quarter-to-date revenue is up 8%.
Investors responded favorably to the news, sending the stock up as much as 12% Wednesday morning.
Snap's spending problem
Snap has been a battleground stock throughout its history, as both the bull and bear cases are clear. As one of only a handful of mainstream social media platforms, Snap has a lot of upside potential. Its user base continues to grow, and digital advertising has been highly profitable at scale, as businesses like Meta Platforms' Facebook and Google (part of Alphabet) have shown. It's also investing in augmented reality technology through product like Lens Studio and Spectacles, with a long-term goal of being a leader in AR.
However, Snap has also been plagued by wide losses and excessive share dilution, as it's spent heavily on share-based compensation. Over the last four quarters, it lost $831 million on a GAAP basis, but its adjusted EBITDA in the same period was a $573 million profit. The difference between those two numbers is largely stock-based compensation.
The bull case just got stronger
Like other tech companies in the current market environment, Snap seems to have realized that its operating structure had gotten bloated. While the cost-cutting and layoffs may have some impact on the company's long-term growth, the company is better off focusing on its core strengths at this point. Cutting $500 million in expenses will make the company significantly more profitable and shows management is serious about delivering profitable growth.
The bigger question for Snap investors is what the business will look like in another year or so, as there's a good chance that the current stock price and its sluggish revenue growth will be fleeting once again. Like other social media stocks, Snap has seen growth slow as advertisers pull back on spending. Also, Apple's ad-tracking-transparency program has made it harder for platforms like Snapchat to target ads and measure performance, meaning it's more difficult for them to deliver value for advertising customers.
However, in another year, those headwinds are likely to have faded, and Snap's steady user growth should reassure investors that revenue growth will reaccelerate. Daily active users increased 18% to 347 million in the second quarter, and user growth remained strong on a sequential basis as well. As that user growth shows, Snap also seem to have done a better job of staving off the threat from TikTok than peers like Instagram.
In the update, Snap shared a chart that showed its average revenue per users (ARPU) has tracked along a similar trajectory to Facebook's based on the age of the company. While that's no guarantee that Snap will reach Facebook's current ARPU level, it's a sign of its potential, and its ARPU should grow as advertisers become more familiar with the platform.
Snap is a difficult company to value, as its profitability metrics are all over the map, depending on what you choose, and its revenue growth has been volatile over its history. Still, at a price-to-sales ratio of 4, the stock is well priced if it can execute on its cost-cutting plan and deliver profitable growth. It may take a few quarters to find out, but it's easy to see today's price looking like a bargain in the not-too-distant future.
