Snap (SNAP 2.11%), the parent company of popular social media platform SnapChat, reported its financial results for the fourth quarter and full-year 2022 after the close of trading on Jan. 31.
Investors were largely unimpressed by the company's lack of revenue growth, and Snap stock sank by more than 10% the following day. But the pessimism lifted when the company's main rival, Meta Platforms, released its own results, which outperformed across the board.
It gave investors hope that Snap's challenges will resolve in the coming quarters, so they rushed back into the stock, sending it up 10% on Feb. 2. But Snap stock could be a buy right now on its own merits, and there is one number in particular that has consistently climbed despite a challenging economic environment.
Let's dive into the results and explore why that figure could be key.
Snap continued to innovate in 2022, despite external challenges
Last year delivered a perfect storm of headwinds for businesses like Snap. As inflation soared, the Federal Reserve increased interest rates at the fastest pace in history, which crushed consumers' spending power. As a result, businesses slashed their advertising budgets for fear they'd get a lower return on investment, and that directly affected Snap's revenue.
Plus, the company continued to grapple with changes to Apple's privacy rules implemented in 2021, which hurt Snap's ability to gather data on its users, and therefore its ability to sell highly-targeted ads to businesses.
To combat that challenge, Snap began investing in proprietary technologies to make ad buying better for its business customers. It now offers more options than ever, including innovative augmented reality (AR) campaigns that are proving highly successful.
Its AR Lens technology allows users to try on clothes virtually, for example, or place virtual furniture in their living spaces, all through Snap's AR engine using the camera on their smartphone. It creates a more interactive, social shopping experience for users.
In the fourth quarter, European fashion retailer Zalando advertised using Snap's AR to allow shoppers to try on clothes, and it converted at a 46% lower cost per order compared to non-AR campaigns. Snap is now gaining traction with even larger organizations like Amazon Fashion, so its investment in this new technology could be set to pay off big time.
Snap's revenue was flat, but cost cuts are improving its bottom line
Snap's revenue grew 12% to $4.60 billion for the full year, but its fourth-quarter result of $1.29 billion, while the highest of the year, was flat from the prior-year period.
Snap battled weak quarterly revenue throughout 2022, so it recognized it would have to cut costs to protect itself against blowout net losses. It moved to lay off about 20% of its workforce in August, which shrank its administrative costs by about $36 million between the third and fourth quarters.
The company invested those savings into further research and development spending to drive product innovation, and it increased marketing.
Overall, Snap has more work to do, but its fourth-quarter loss per share of $0.18 was its smallest of 2022.
The one big reason to buy Snap stock right now
I touched on the weak economy, which is suppressing advertising revenue for social media companies at the moment. But those conditions won't last forever, and that leads to the one big reason to buy Snap stock now: user growth.
Snap had 375 million daily active users (DAUs) in the fourth quarter, up 17% year over year. That means when businesses do pick up their marketing spend again in the future, Snap will have a much bigger audience to monetize.
On that note, Snap's average revenue per user (ARPU) ticked up to $3.47 in the quarter, and while that was down compared to the prior-year period, it was the highest level of 2022.
Has Snap's ARPU finally reached a bottom? It's hard to say for certain, but with core economic metrics like inflation appearing to have peaked in mid-2022, it makes sense that confidence among advertisers would be on the rise at the moment.
If DAU and ARPU continue to climb in 2023, the company could see a drastic reacceleration of its revenue growth. With a better economic outlook combined with Snap's continued investments in improving the advertising experience for businesses, the company might be set up for a big year. That's good news for potential investors, who can buy the stock right now at an 86% discount to its all-time high.
