Snap (SNAP -2.91%) is in cost-cutting mode as it recently announced layoffs and plans to bring its expenses down. It's a move that is overdue, and one that is needed for the business to become a more tenable investment. But as the following charts will demonstrate, it's not just expenses that are a problem for the tech company.
Snap's growth rate is the slowest it has ever been
Snap is in a tough spot, having to fight for the attention of teens and young adults among a myriad of social media apps. And its features aren't unique; augmented reality, for example, is available on many types of apps.
The positive is that the company is still growing its user base. It reported 347 million daily active users as of the period ending June 30, representing a year-over-year growth rate of 18%. But Snap's top line hasn't been as strong because advertisers have been cutting back on spending amid inflation. Last quarter, the company announced that its year-over-year growth rate had slowed since going public:
SNAP revenue (quarterly YoY growth). Data by YCharts. YOY = year over year.
Operating margins are also a big problem
Now that growth is slowing, it's more important than ever for the company to also pay closer attention to its operating margins:
SNAP operating margin (quarterly). Data by YCharts.
Through the first six months of the year, Snap's operating loss totaled more than $672 million. Even with $500 million in annualized cost savings from its recent round of cuts, that still might not be enough to turn an operating profit. While it would certainly be a step in the right direction to cut down some costs, investors shouldn't assume that this will be enough to make the business profitable.
Free cash flow isn't as good as it looks
When a company reports its earnings, free cash flow is an important number because it can tell you how well the business is funding its own growth. And while Snap investors might be encouraged by the chart below, which shows multiple periods of positive free cash flow, it doesn't always tell the whole story.
SNAP free cash flow (quarterly). Data by YCharts.
Investors need to remember that stock-based compensation is dilutive as well. These costs are added back to calculate operating cash flow (and thus, free cash flow), as they technically don't result in an outflow of money.
Last quarter, for example, Snap's stock-based compensation was $319 million. While it's not a cash expense for the business, it is dilutive since it costs shares. And so simply generating positive free cash flow doesn't mean the business isn't diluting its shareholders or that it's operating efficiently.
Like with its operating margins, Snap needs a lot of improvement in this area as well. The key takeaway here is that even with such large stock-based compensation, the company has still reported significant outflows of cash.
Share count continues to rise
Between a lack of profitability and lots of share-based compensation, it should be no surprise that Snap has also been steadily increasing its share count over the years.
SNAP shares outstanding. Data by YCharts.
Not until Snap addresses the issues represented by the previous three charts will this visual likely improve. In the past year, the stock has fallen 85% (the S&P 500 has declined by just 13%), and that only exacerbates this problem. That's because if Snap needs to raise cash, it will have to issue more shares than it would have if its share price was higher. This is what makes the stock particularly risky right now: Its low price and poor financials could mean lots of dilution is in store for investors.
Is Snap worth taking a chance on?
Even if you're a big believe in Snap, you're probably better off waiting on the sidelines. The company's financials need lots of work, and now even Snap's growth rate looks to be in trouble. Rather than buying the dip, investors might want to hold off until there's some sustained progress in its financials. Otherwise, the growth stock could continue to fall lower as the company might have to issue more shares to keep funding its operations.
