Shares of Snapchat operator Snap (SNAP 1.08%) experienced a run-up near the end of 2023, hitting a 52-week high of $17.90 in December. But the trend changed in 2024. After a period of sideways moves, the stock plunged after the company released its fourth-quarter results on Feb. 6.
That drop may indicate reasons exist to avoid the stock, or it may have created a buying opportunity. Wall Street analysts' median price target on the stock is $13.90, which suggests an upside given its current level.
Could this social media company be on a trajectory toward producing strong financial results over the long haul?
Snap's revenue ups and downs
In evaluating an investment in Snap, it's necessary to understand why the firm's latest earnings report resulted in a stock price drop. The reason lies with the company's revenue growth, which failed to meet Wall Street's expectations.
Snap sales rose 5% year-over-year in Q4 to $1.4 billion. Moreover, the company's full-year revenue of $4.6 billion was flat compared to 2022. For a company considered a growth stock, those results were underwhelming.
However, the situation may improve for Snap in 2024. The company produces the bulk of its revenue from selling ads on the Snapchat app. When the ad industry experienced softness in 2022 and into 2023, Snap suffered. But the advertising market began a recovery in 2023. And in 2024, spending on digital advertising is forecast to rise by 13%.
The ad market's recovery should provide a tailwind for Snap this year. Management expects Q1 revenue of at least $1.1 billion, which would be 11% higher than the prior-year period's $989 million.
Snap's user growth
While the ad market's rebound is good news for Snap, its advertising business is only valuable if the company can increase Snapchat's user base. In this area, Snap is achieving success, measured in daily active users (DAUs), although its growth rate is slowing.
| Quarter | Daily Active Users | Change (YoY) |
|---|---|---|
| Q4 2023 | 414 million | 10% |
| Q3 2023 | 406 million | 12% |
| Q2 2023 | 397 million | 14% |
| Q1 2023 | 383 million | 15% |
| Q4 2022 | 375 million | 17% |
DATA SOURCE: SNAP. YOY = YEAR-OVER-YEAR.
Snap has been adding new features to Snapchat to encourage established users to remain active and attract new ones. One of these is its Snapchat+ subscription service, which reached 7 million subscribers in Q4. By developing a subscription-based offering, Snap is also trying to diversify its revenue beyond advertising.
Snap is also looking to artificial intelligence (AI) to boost both DAUs and revenue. It's using AI to provide users with features such as the ability to create AI-generated images. The company is also dedicating unique AI features for Snapchat+ to encourage people to sign up for the service.
Despite the steady rise in DAUs and its Q4 uptick in ad sales, Snap is not profitable. In 2023, the company racked up a net loss of $1.3 billion while spending nearly $2 billion alone on research and development in technologies such as AI and augmented reality. In February of this year, the company announced it was reducing expenses by cutting 10% of its staff.
Deciding on Snap stock
An optimistic outlook for the digital advertising market and consistent DAU growth are just some of Snap's positives. The company also generated Q4 free cash flow (FCF) of $110.9 million, up from $78.4 million in the prior-year period.
FCF indicates a company's ability to invest in its business, pay down debt, fund dividends, and repurchase shares -- and Snap repurchased 18.4 million shares in Q4.
The company's balance sheet at the end of 2023 included total assets of $8 billion, with $3.5 billion of that in cash, cash equivalents, and marketable securities. It had total liabilities of $5.6 billion.
Even with these strengths, Snap's challenge is that it operates in a competitive arena, battling rivals such as TikTok and Meta-owned Instagram for users and advertising dollars. Estimates place Snap's share of the digital advertising market at around 2%. Contrast this with Meta's 20% share.
In this context, Snap's massive net loss last year is concerning. Management admitted its technology investments might not pay off. If they don't, it would, according to the company, "adversely affect our ability to settle the principal and interest payments on our outstanding convertible senior notes or other indebtedness when due."
Based on that, it would be wise to hold off on investing in Snap at this time. Instead, observe how the company performs over the next few quarters, looking for a trend of rising revenue and further DAU growth.
If Snap shows it can consistently meet or exceed its quarterly revenue estimates, then you can reevaluate if it is a worthwhile long-term investment.
