What happened
Shares of Snap (SNAP 2.24%) fell by as much as 14.3% in early trading Wednesday after the social media company reported its fourth-quarter financial results. The stock recovered slightly from that session low, but was still down by 11.4% as of 10:30 a.m. ET.
So what
For the quarter, revenue was up slightly to $1.30 billion, but the company swung from net income of $23 million in the prior-year period to a net loss of $288 million. Free cash flow fell from $161 million a year ago to $78 million.
On the conference call, management said that investments in new advertising technology have weighed on the company's bottom line, and noted that its ad partners have cut back on their spending. But it hopes that better tracking and analytics will lead to higher ad rates in 2023. So far, the market isn't buying that bullish thesis.
Now what
There are a number of headwinds hitting Snap all at once. First, it relies primarily on brand advertising, and that went into decline as the economy weakened and fears of recession grew in 2022. Snap has also been slower to react to changes in the ad market than its social media rivals, which has hurt its direct response advertising revenue. Management said that upgrades to its system were delayed until this quarter to avoid disruption during the holidays, and predicted that would likely cause some weakness in its first-quarter numbers.
Add it all up and investors didn't like what they saw in Snap's business. It's possible that Snap will get back to growth and profitability in time, but given the current trends, that could take years. It's easy to like some of its engagement metrics -- like its 17% increase in daily active users -- but until the company can effectively monetize those users, it'll be hard to make a buy case for the stock.
