Snap's (SNAP 27.63%) stock price plunged 33% during after-hours trading on Feb. 6 in response to the social media company's fourth-quarter report. Its revenue rose 5% year over year to $1.36 billion but missed analysts' expectations by $20 million.
Snap's adjusted net income fell 40% year over year to $128 million, or $0.08 per share, but still cleared the consensus forecast by $0.02 per share. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dropped 32% to $159 million.
Those messy headline numbers suggested that Snapchat was struggling to keep pace with Meta Platforms' (META 0.43%) Instagram and ByteDance's TikTok. They were also dismal compared to Meta's superior growth rates.
Snap's stock now trades more than 80% below its all-time high and 30% below its IPO price. Shares cost less than 4 times this year's estimated sales. Can this stock generate millionaire-making gains for patient investors?
Image source: Getty Images.
Why did the bulls abandon Snap?
Snap initially carved out a high-growth niche in the social media market with its ephemeral messages, stories, and augmented reality (AR) filters. From 2017 to 2021, its revenue increased at a compound annual growth rate (CAGR) of 49%, even as the pandemic disrupted its digital advertising business in 2020. Over that same time frame, its daily active users (DAUs) rose at a CAGR of 14% from 187 million to 319 million.
During Snap's investor day presentation in early 2021, the company boldly declared it could achieve 50%-plus revenue growth for "multiple years" as it gained more DAUs, rolled out more AR features, and expanded its ecosystem.
However, Snap's revenue only rose 12% in 2022 and stayed nearly flat in 2023. Over the past year, its growth in DAUs decelerated as its increasing dependence on lower-revenue overseas users reduced its average revenue per user (ARPU).
|
Metric |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
DAU growth (YOY) |
17% |
15% |
14% |
12% |
10% |
|
ARPU growth (YOY) |
(15%) |
(19%) |
(16%) |
(6%) |
(5%) |
|
Revenue growth (YOY) |
0% |
(7%) |
(4%) |
5% |
5% |
Data source: Snap. YOY = year over year.
Like Meta, Snap struggled with the privacy changes Apple implemented in iOS, which made it tougher to craft targeted ads from third-party data. The company also faced competition from TikTok. Snap tried to overcome those challenges by expanding its first-party Direct Response ads and its Spotlight short video platform, but those strategies only slightly stabilized its business in the second half of the year.
By comparison, Meta's revenue dipped 1% in 2022 but grew 16% in 2023 as it leveraged its AI-driven algorithms to craft new ads from first-party data, expanded its Reels short video platform to counter TikTok, and offset its lower ad prices with more impressions. It also attracted more spending from Chinese e-commerce and gaming companies.
Is Snap's stock bottoming out?
Snap's slowdown was disappointing, but the worst might be over. For the first quarter of 2024, it expects its revenue to rise 11%-15% year over year. Analysts see sales growing 14% to $5.3 billion for the full year.
Snap's adjusted EBITDA margin also jumped from 0.8% in 2022 to 3.5% in 2023 after it laid off 3% of its staff and phased out its enterprise AR business. Analysts expect that figure to rise to 6% in 2024 as its revenue growth accelerates again.
Looking further ahead, Wall Street pros predict Snap's revenue and adjusted EBITDA will increase 16% and 143%, respectively, in 2025 as the macro and competitive headwinds weaken. We should take those longer-term estimates with a grain of salt, but Snap is still clearly gaining new DAUs and exercising tighter financial discipline in this challenging market.
But can Snap generate millionaire-making gains?
If you invested $10,000 in Snap today and its valuations held steady, the company would need to increase its revenue at a CAGR of 26% over the next 20 years to grow your investment to $1 million. That would require a significant acceleration from its latest growth rates, which doesn't seem likely given all the competition it faces in the social media market.
Snap might seem like a cheap value play right now, but it could get a lot cheaper if it fails to generate double-digit revenue growth again. Simply put, Snap isn't expanding fast enough -- nor is it cheap enough -- to be considered a millionaire-maker growth or value stock. Its business isn't doomed yet, but it could stay in the penalty box for years until it generates growth comparable to Meta's while meaningfully expanding its profit margins.
