It's been a rough past few days for Snap (SNAP 0.99%) shareholders. The Snapchat parent's stock is trading down more than 20% since posting its second-quarter numbers last Tuesday, in fact, and still testing lower lows. The company's revenue miss clearly rattled investors.
The question is, is yet another disappointing quarter enough of a reason to finally give up on Snap? Or is this stock's recent setback a chance to step into a compelling story at an even better price?
Snap's second-quarter numbers
Snap's Snapchat app is a social media platform, albeit a very different one than Meta Platforms' Facebook or X (formerly known as Twitter). Namely, Snapchat doesn't feature a "news" feed like X and Facebook do in the center of their user interfaces. Snapchat's focus is instead on messaging and sharing pictures specifically with friends.
Image source: Getty Images.
The core business is still ultimately the same as any social media site's, though: advertising. More users and usage of the Snapchat app means more opportunities to monetize the platform.
And Snap did a fair amount of business during the three-month stretch ending in June. The top line of $1.34 billion for the recently ended quarter was up 9% year over year, lifted by a 9% increase in the average number of daily users (469 million) and 7% growth in average monthly users (932 million). Most of that user growth took shape outside of Europe and North America. Although the company remains in the red with a reported net loss of $262.6 million, or $0.16 per share, free cash flow swung from a negative $73.4 million to a positive $23.8 million this time around.
Problem? The analyst community was calling for a top line of $1.35 billion and a per-share loss of $0.15, matching the year-ago quarter's loss. Sales growth guidance for the third quarter (now underway) was in line with estimates, but investors also noticed that these numbers still trail those being reported by Meta and other social media companies. In addition, "an issue related to our ad platform" crimped both the top and bottom lines by underpricing Snap's ad inventory. A company as developed as Snap shouldn't face such self-created glitches.
Nevertheless, this stock's subsequent setback is far more of an opportunity than an omen.
(Much) more to like in the long run than not
Snap's got plenty to figure out. Even while the technical glitch was temporary, it's concerning that user growth has outright stalled in North America and Europe, where average per-user revenue is highest. It's also simply not growing as briskly as its rival platforms are, and perhaps never will. As RBC Capital Markets analyst Brad Erickson noted, last quarter's numbers "will continue to reinforce the bear case that Snap cannot break out of being a smaller ad platform lacking the ability to durably grow its direct response business in line with the market."
Just don't lose sight of the bigger, longer-term picture. And that picture is still pretty bullish for a handful of reasons.
One of those reasons is Snap's never-ending willingness to learn from its past failures as well as past successes, and then evolve as merited. Case in point: In June, the company announced the augmented reality glasses it's been working on for a while now will be ready for launch sometime in 2026. Its first go-around with "Spectacles" back in 2016 ended up being a bit of a disaster. But those glasses were only a camera, and AR technology has come a long way since then. Undeterred by its previous flop, Snap's next shot at stand-alone hardware is a reasonable risk.
In the meantime, the company's doing something far more practical by adding artificial intelligence-powered tools (including AI-generated ads) to its advertisers' toolkit. Its relatively new Sponsored "Snaps" are also producing 20% more conversions than ordinary ads.
Perhaps the overarching argument for betting on beaten-down SNAP shares despite them going nowhere since their 2021/2022 rout is that Snapchat still has a long growth path ahead of it.
It's difficult to quantify, or even see. But the world is growing weary of the toxicity on Facebook and X. Consumers are increasingly looking for alternative online gathering places where they're in control of what they're exposed to. They're finding less-crowded and more decentralized corners of the web on platforms like Discord, Bluesky, and yes, Snapchat. Indeed, the Snapchat app lends itself to providing what its biggest cohort of users -- the Gen Z crowd, ages 16 to 30 -- craves to the point of demanding it: advertiser authenticity.
According to recent research from Target's retail media network Roundel, 73% of Gen Z regularly watch influencers' shopping videos. That's more than 40% above the average. And website hosting service provider WPEngine says 82% of Gen Z is more likely to trust a company that uses real people (like Snapchat's creators) rather than paid actors in its ads.
Ads on Facebook and X tend to lack this authenticity, while Snapchat's heavily featured ads from the platform's well-followed creators is about as authentic as it gets.
Focus on the long-term marketability of the business
It's tough to get excited about buying into any promising business while that business's results are lackluster, and Snap's are. The stock's lingering lethargy isn't helping the bull thesis either.
Just bear in mind something that Warren Buffett said long ago that still applies in the modern market environment: "If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes." Snapchat's got the right idea and formula. It's just going to take a while to prove it. It's going to take even longer for the market to fully see it.
On the other hand, as other investors increasingly do see it, they'll at least start pricing in Snap's promising future. That's why it might be wiser to go ahead and wade into a position now while nobody else is thinking about doing the same. As Buffett has also said, "Be fearful when others are greedy, and be greedy when others are fearful." You can control your total risk just by adjusting the size of the Snap stake you take on.
