Where Will Snap Stock Be in 1 Year?

Snap's (SNAP -4.04%) stock price plunged 15% during after-hours trading on Jan. 31 following its fourth-quarter report. The social media company's revenue stayed nearly flat year over year at $1.3 billion and missed analysts' estimates by $10 million. Its adjusted earnings fell 38% to $0.14 per share but still cleared the consensus forecast by two cents.

Snap's high-growth days are clearly over, and the stock's decline of more than 60% over the past 12 months reflects that slowdown. But can it turn around its business this year and impress the bulls again?

Image source: Getty Images.

Why did Snap's growth stall out?

Snap's revenue rose 46% in 2020, even as its advertising business was disrupted by the pandemic, and surged 64% in 2021 as those headwinds dissipated. During its investor day in February 2021, it boldly claimed it could grow its annual revenues by about 50% for "multiple years."

But Snap faced a sobering reality check in 2022. Apple's privacy update on iOS, which enabled its users to opt out of data tracking features for individual apps, throttled the growth of Snap's targeted ads. The broader advertising market also cooled off as inflation and other macro headwinds forced companies to rein in their spending. To make matters worse, ByteDance's TikTok overtook Snapchat as the top social media platform for U.S. teens in 2022, according to Piper Sandler, and remains a formidable competitor in most of the world.

Snap's revenue still rose 12% to $4.6 billion in 2022 as its total number of daily active users (DAUs) increased 17% to 375 million. However, its year-over-year growth in DAUs, average revenue per user (ARPU), and quarterly revenue have all decelerated significantly over the past year.

Data source: Snap. YOY = Year over year.

Snap continues to gain new DAUs, but most of that growth comes from its overseas users, who generate much lower revenue than its North American users. That's why its average ARPU is still declining. Snap expects its revenue to decline 2% to 10% year over year in the first quarter of 2023, which broadly misses analysts' expectations for 2% growth.

Snap doesn't expect the advertising market to recover quickly this year. During its Q4 2022 conference call, CEO Evan Spiegel said "advertising demand hasn't really improved, but it hasn't gotten significantly worse" as its advertisers continue to manage their spending "very cautiously."

Snap has been trying to grow its revenue again with new data tracking tools, ad formats, and augmented reality (AR) tools. It's also trying to reach older users and expanding its fledgling Snapchat+ subscription service, which ended the year with more than 2 million subscribers. However, it could be tough to balance all that spending with its decelerating revenue growth.

Streamlining its business to narrow its losses

Last August, Snap said it would lay off about 20% of its workforce and halt the development of its Snap Originals videos, integrated mini programs, in-app video games, and Pixy selfie drone. It also shut down its location-based social networking app Zenly and music creation app Voisey.

It makes sense for Snap to streamline its business as it faces tough macro and competitive headwinds, but those deep cuts also dash any hopes for Snapchat to expand into an all-in-one "super app" like Tencent's WeChat -- which enables its users (who are mainly in China) to consume digital media, make purchases, play games, and communicate with each other without ever leaving the platform. Tencent is still one of Snap's top investors, and it certainly seemed like Snapchat was attempting to become a "super app" prior to its slowdown in 2022.

Those cost-cutting efforts boosted Snap's operating and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins sequentially over the past two quarters, but they still fell year over year in the fourth quarter.

Data source: Snap.

Snap expects its adjusted EBITDA margin to decline sequentially and year over year to break-even levels in the first quarter of 2023. Therefore, investors should expect its spending to outpace its revenue growth again as it continues to rebuild its ad platform in this tough macro environment.

Where will Snap's stock be in a year?

Snap's stock trades at 4 times its 2023 sales and 28 times its adjusted EBITDA. Those valuations are a bit high for a company that faces unresolved platform-related, macroeconomic, and competitive challenges. Meta Platforms, which faces the same headwinds, trades at just 3 times its 2023 sales and 8 times its adjusted EBITDA.

Snap's valuations are also pegged to analysts' optimistic expectations for 9% sales growth and 75% adjusted EBITDA growth this year. Those forecasts will likely be reduced in response to Snap's gloomy first-quarter outlook, so Snap's real forward valuations could actually be much higher. Therefore, I think Snap's stock will either stagnate or decline this year.