Shares of Snap (SNAP +3.36%) have not been for the fainthearted, crashing at the start of the year only to surge back higher following a better-than-expected first-quarter update. Consistent profitability has been elusive for the social media and tech platform, but growth remains positive with encouraging signs of improving monetization.
There are plenty of reasons for investors to be skeptical of Snap, with the stock highly volatile and down more than 80% from its all-time high in 2021. Still, the potential that the company finally gets its business strategy right in what could be an emerging turnaround highlights a significant upside opportunity.
Is now a good time to buy Snap or should you consider selling at this point? Let's take a closer look.
NYSE: SNAP
Key Data Points
Reasons to sell shares of Snap
Snap, through its Snapchat platform, is recognized as a pioneer in many of the features that are now standard on social media platforms, like short-form videos and a mobile-first experience. On the other hand, the company fell behind the stronger growth of rivals like Meta Platforms' Instagram and privately held TikTok in recent years.
The concern is that Snap may have lost its innovation edge while becoming less relevant in the U.S. and Europe. The metric that stands out is the number of Snap daily active users (DAUs) in North America at 100 million in the first quarter of 2024, flat since 2022. While the company has found traction in emerging markets, trends have failed to live up to expectations set at the height of the pandemic-era boom, which helps explain the sell-off in shares over the period.
In the first quarter Snap generated $2.83 in average revenue per user (ARPU) globally, which is well below Meta Platforms' $11.20 in the comparable family average revenue per person (ARPP) measure this year. Investors who are doubtful Snap can compete in the long run against its larger competition may want to consider selling with the stock near its 52-week high.
Image source: Getty Images.
Reasons to buy Snap
The good news is that Snap has made progress in adapting to the shifting social media landscape by focusing on its strengths and core users who lean younger compared to rivals.
In Q1, Snap reported a solid 21% revenue growth driven by a 10% increase in global DAUs to 422 million. The bulk of users came from the "rest of the world" region outside North America and Europe, which now represents more than half of all users. Favorably, the global ARPU increased by 10% from Q1 2023, with a double-digit increase in all regions.
Image source: Snap.
Within the top-line revenue figure, a major theme has been the success of the premium Snapchat+ subscription service, reaching 9 million paid users. This area of monetization is highly accretive to cash flow and earnings while working to diversify the business mix.
Snap management is also citing momentum in the number of small and medium advertisers on the Snapchat platform, which increased by 85% year over year, reflecting a positive response to a new ad-optimization system. Favorably, the Q1 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $46 million improved from $1 million in the prior-year quarter.
The company is guiding for a second-quarter annual revenue increase between 15% and 18% and adjusted EBITDA between $15 and $45 million, reversing a $38 million loss in Q2 2023. The plan is to keep lowering infrastructure and content costs as the platform scales on a path to stronger profitability.
Confidence in Snap's strategy to continue monetizing the global user base while leading in areas like augmented reality could make the stock a compelling investment idea.
Decision time for Snap
I'm cautiously bullish on Snap, seeing room for global ARPU to climb higher while acknowledging the still speculative nature of the stock.
Shares of Snap are trading at 66 times the average of Wall Street estimates for 2024 adjusted earnings per share (EPS) of $0.25. This forward price-to-earnings (P/E) ratio is lofty, but I believe can be justified in a scenario where earnings ramp up into 2025 and beyond.
For investors who already own shares of Snap, a hold rating is likely the prudent position. Investors on the sidelines can likely take a wait-and-see approach over the next few quarters.
