The pain train just continues for Snap (SNAP 27.63%) shareholders. After rising 89% in 2023, the social media platform and smartphone app saw its shares collapse below $12 after posting another quarter of losses. Despite growing its user count, Snap has failed to generate ad revenue on par with competing social media companies like Meta Platforms.
After its recent fall, Snap now trades close to $11 per share and is off 87% from its all-time high. Does that make the stock a buy, or is there more pain ahead for Snap shareholders?
Growing users, focusing on new initiatives
Snap started as a messaging and ephemeral photo-sharing application more than a decade ago. Today, it remains a messaging app for hundreds of millions around the globe but has morphed -- or, more aptly, is trying to morph -- into a full-fledged entertainment platform. People continue to join the platform with daily active users (DAUs) growing 10% year over year to 414 million in the fourth quarter. This makes Snap one of the largest smartphone apps in the world, and it's only growing in popularity.
With all these users, Snap is now trying to upsell them to new services beyond the core messaging product, which is hard to make money on. One semi-successful initiative is Snapchat+, a premium tier that gives users access to new features early and better profile/editing features. It currently has 7 million subscribers paying $4 a month, which equates to $336 million in annualized subscription revenue. For context, Snap's entire business generated $4.6 billion in revenue last year.
Management is pouring a lot of resources into augmented reality (AR) tools for the Snap platform too. It seems to be seeing some success here with its AR lenses now having been viewed 3 trillion times and 300 million users engaging with AR tools every day on the Snap platform. But these tools are not free to build. Last year, Snap spent close to $2 billion on research, a lot of which likely went to AR products.
This leads to the major problem with Snap: It can't stop losing money.
Why is the company still unprofitable?
Snap has never generated a profit. In fact, its numbers have only gotten worse in recent years after it looked like the company was on the road to positive earnings during 2020 and 2021. In 2023, Snap posted an operating loss of $1.3 billion on $4.6 billion in revenue. In 2022, it posted an operating loss of $1.4 billion on on nearly the same revenue.
Not much seems to be changing with Snap, which is why investors keep souring on the stock. A big problem is stock-based compensation. In 2023 alone, the company gifted $1.3 billion in stock-based compensation to employees, or 28% of revenue. This is not a sustainable level of shareholder dilution, no matter how fast you're growing, and Snap isn't really growing.
Earnings matter. In fact, they are the only thing that matters at the end of the day. Snap needs to fix its profitability issues, or else this stock will continue to head lower.
Data by YCharts.
Should you buy below $12 per share?
If you plan to buy the dip on Snap stock, you need to be confident it can grow revenue while also trimming its operating expenses. Otherwise, this stock looks overpriced at a market cap of $18 billion. Why? Let's go through the numbers.
Let's say Snap could somehow pull off a miracle and trim $1.9 billion off its operating expenses without losing any revenue. That would bring it from a heavy operating loss to $500 million in annual earnings. On its current market cap of $18 billion, this earnings level equates to a price-to-earnings ratio (P/E) of 36, which is well above the market average.
So the issue is you're betting on two things Snap is struggling to achieve -- strong, consistent revenue growth and disciplined cost management -- in order for the stock to outperform going forward. From my seat, this makes Snap a bad bet for investors. Avoid its shares unless the company's earnings start moving in the right direction.
