Snap (SNAP 27.63%) is the parent company of the social media platform Snapchat. Its stock soared 108% between September and January due in part to improved investor optimism caused by the new bull market in the S&P 500. Plus, the digital advertising market appears to be recovering and fears of a recession in the broader economy are fading.
However, when Snap reported its financial results for the fourth quarter and full 2023 year earlier this month, its stock plunged 36%. The company's revenue growth remained sluggish, and its profitability forecast disappointed investors.
Nonetheless, I think there were several positive takeaways from Snap's results -- and several reasons why its stock could soon snap back.
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Snap continues to focus on innovation
Snap generated basically zero revenue growth in 2023 compared to 2022. It was a stark contrast to its rival, Meta Platforms (NASDAQ: META), which saw an impressive 16% increase in its revenue. Both companies were negatively affected in 2021 when Apple changed its privacy rules, which prevented them from serving their users with highly targeted ads. However, Meta has recovered far more quickly than Snap.
Snap is working on a number of initiatives to improve performance for advertisers in order to attract their marketing dollars. Snap's latest 7-0 Pixel Purchasing model is designed to optimize ad campaigns for clicks and conversions rather than reach (views). The company says online jewelry retailer James Allen recently saw an 18% drop in cost per action (CPA) and a 67% increase in its return on investment thanks to the new Pixel model.
Snap is also building custom tools specific to certain industries to help small businesses yield better results. Plus, it recently launched Snap Promote so organizations can easily create an ad from any public post they've made to their profiles previously. Overall, these initiatives drove a 20% year-over-year increase in small and medium-size businesses using Snapchat as an ad platform.
Finally, Snap continues to be a leading developer of augmented reality (AR) technology. More than 300 million Snapchat users engage with AR features every single day, so it's important for advertisers to lean into the tech to reach those potential customers. Snap makes it easy for any business to create an AR Lens: They can simply take a photo of their product, and Snap's technology will render an AR version of it that users can "try on" virtually.
Beauty brand Rimmel London used an AR ad campaign for its new mascara during Q4, and it had an impressive 84% view-through rate. In other words, 84% of people who saw the ad chose to watch all of it, without skipping. The ad also drove a 23% increase in product awareness.
Snap's Q4 revenue grew modestly, but its bottom line remains a concern
As I touched on earlier, Snap's full-year revenue for 2023 came in at $4.6 billion, which was flat compared to 2022. However, the company's fourth-quarter revenue came in at $1.36 billion, which was a modest 5% year-over-year increase. It was also the third consecutive sequential boost, so it's looking more likely that Snap's revenue bottomed at the beginning of 2023.
The company's forecast for the upcoming first quarter of 2024 points to revenue growth as high as 15%, which would be a convincing acceleration.
Snap's subscription-based Snapchat+ service is a fast-growing contributor to revenue. Users who pay $3.99 per month gain access to new features earlier than everybody else. They were the first to try the new My AI tool last year, which uses OpenAI's GPT-4 technology to power an artificial intelligence (AI) chatbot within SnapChat.
In Q4, Snapchat+ had 7 million subscribers, which was a 250% year-over-year increase. That translates into $249 million in annual recurring revenue going forward, assuming no further subscriber growth, which is helpful while Snap continues to work on improvements for advertisers.
But Snap's profitability trends are disappointing investors. The company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $159 million in Q4, and while that was the best quarterly result of 2023, it was a 31% drop from the same period of 2022. Plus, Snap's guidance for Q1 2024 points to negative adjusted EBITDA, which will mark an unexpected (and unwelcome) reversal of the company's progress toward the end of last year.
Snap slashed 500 jobs (10% of its workforce) following its latest financial update, in an attempt to cut costs and improve its bottom line. That's a positive step, but time will tell whether it's enough to yield results.
Why Snap stock is a buy in the wake of its recent drop
While the recent 36% plunge in Snap shares appears extreme, it's important to remember they're trading 86% below their all-time high. The stock has been out of favor among investors since the tech frenzy of 2021 came to an end. There were fears usage would decline once the pandemic-era lockdowns and social restrictions were lifted, which would impact the company's potential to grow.
As it turns out, Snapchat is still attracting hordes of new users. It had 414 million daily active users in Q4, which was up 10% year over year and marked a record high. The platform also had more than 800 million monthly active users.
That's why I remain cautiously optimistic about Snap's future. The company has more users than at any time in its history, and as it continues to optimize its advertising tools, it could eventually deliver a substantial acceleration in revenue growth. As I touched on earlier, there are already signs that an acceleration is underway.
Owning Snap stock does pose risks, and since Meta Platforms is firing on all cylinders right now, owning the latter instead does make a lot of sense for investors looking to profit from the social media space. However, if Snap's advertising tools continue to gain momentum and its revenue growth keeps accelerating as expected, now might prove to have been a great time to buy in.
