Snap (SNAP 0.68%) served up another stinker of an earnings report on Tuesday night.
The social media company known for its disappearing messages got crushed again by a challenging ad market, and the stock fell by double digits on Wednesday. Revenue in the quarter was flat at $1.3 billion, which matched analyst estimates, and the company's adjusted earnings per share of $0.14 fell from $0.22 in the quarter a year ago -- though that still beat the consensus at $0.11.
However, those adjustments mask deeper problems with the business. It lost $289 million on a GAAP basis, and the company continues to spend aggressively on share-based compensation, despite promises to reel it in. Share-based compensation rose roughly 50% in the quarter to $451 million, though the company counteracted that dilution with $500 million in share repurchases. As a result, its cash balance fell by nearly $500 million in the quarter to $1.4 billion.
Echoing statements in recent quarterly reports, CEO Evan Spiegel acknowledged the difficult macro environment, saying, "We continue to face significant headwinds as we look to
accelerate revenue growth, and we are making progress driving improved return on investment for advertisers and innovating to deepen the engagement of our community."
Management declined to give guidance due to "uncertainties related to the operating environment," but it did give a performance update in the letter to shareholders, saying that revenue was down 7% quarter to date. The company also forecast a decline of 2% to 10% for the quarter and break-even adjusted EBITDA, which would compare to a $64.5 million EBITDA profit in the quarter a year ago.
Image source: Getty Images.
The good news
While Snap's financial results were dismal, the underlying product continues to show signs of growth and progress. Its user base continued to expand -- daily active users (DAUs) were up 17% to 375 million, with the company adding 12 million users in the fourth quarter. Growth in North America, its most important market, was flat from the previous quarter at 100 DAUs, and up 3% year over year.
The company saw solid growth in Europe, adding 4 million users in the quarter to reach 92 million, and the rest of the world segment where it added 8 million users to reach 183 million, increasing 31% year-over-year.
NYSE: SNAP
Key Data Points
Snap company is also gaining traction with Spotlight, its short-form video product that competes with TikTok. It said total time spent watching Spotlight content more than doubled from a year ago, and its Snapchat+ subscription service continues to grow, reaching more than 2 million paying subscribers.
In other words, Snap is successfully building out its user base and growing its product ecosystem. Snapchat continues to resonate with users, but the financial side of the business, which is dependent on advertising, is severely lagging.
There's a clear disconnect between the performance of the product and the performance of the business.
What it means for investors
Snap isn't alone in suffering from the slowdown in the ad market. Fourth-quarter results for its peers weren't in as of the time of writing, but ad giants like Meta Platforms and Alphabet have both experienced sharp decelerations in revenue growth, as have other social media platforms like Pinterest and Twitter.
Snap has taken steps to reel in costs, cutting its headcount by 20% from its peak in the second quarter and canceling non-core projects, though share-based compensation could use some attention.
With its cost cuts, solid user growth, and traction in products like Spotlight and Snapchat+, the stock looks well-positioned to bounce back when the economy starts to turn around and ad demand comes back.
That's taking longer than investors would like, but the social media stock looks affordably priced at a price-to-sales ratio under 4 if you believe it can get back to solid growth.
The economic cycle moves slowly, but patient investors should be rewarded eventually.
