Snap Shares Plummet Following Earnings Report; Is It Time to Buy?
Snap Inc., the parent company of the popular social media platform Snapchat, experienced a significant decline in its stock price following the release of its second-quarter earnings report in July 2023. The company’s shares fell sharply due to concerns regarding slowing growth, operational missteps, and an increasing net loss. Despite these challenges, a closer examination of the earnings report reveals a more complex picture, highlighting several positive developments within the company.
Performance Highlights
Snap reported second-quarter revenue of $1.345 billion, reflecting a 9% increase from the same period last year. In a crucial indicator of user engagement, the number of daily active users (DAUs) rose by 9% to 469 million, while monthly active users (MAUs) climbed 7% to 932 million. Additionally, operating cash flow reached $88 million, and free cash flow turned positive at $24 million, a notable improvement from the previous year when the company reported cash burn.
Despite these encouraging figures, Snap recorded a net loss of $263 million, which was wider than the $249 million net loss from the year-ago quarter. The adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also decreased to $41 millionEmerging Opportunities and Risks
One of the standout metrics from the earnings report was the growth in “other revenue,” which primarily comes from subscription services like Snapchat+. This segment saw a remarkable 64% year-over-year increase, with Snapchat+ subscribers rising approximately 42% to nearly 16 million. Another promising development was the introduction of sponsored Snaps—video advertisements directly sent to users’ inboxes. According to Evan Spiegel, Snap’s co-founder, users who engage with sponsored Snaps display significantly higher engagement levels, doubling conversion rates and increasing click-to-convert ratios fivefold compared to other ad formats. Despite these positive trends, Snap’s valuation continues to raise concerns among investors. The company has historically relied on equity dilution and stock-based compensation to finance growth. Although the second quarter included a $243 million share repurchase program involving 30 million shares, the burden of stock-based compensation remains substantial. Full-year stock-based compensation is projected to exceed $1.1 billion, placing additional pressure on a company with a market capitalization of only $12 billion. While the recent sell-off may appear overblown, the stock price has not yet reached a level that would categorize it as a bargain. The potential for a bullish scenario hinges on Snap’s ability to scale new revenue streams, stabilize pricing, and reduce reliance on shareholder dilution. Overall, Snap’s current valuation raises questions, especially in light of its history of equity dilution and dependence on non-cash compensation. Nonetheless, the growth of its subscription services, the introduction of sponsored Snaps, improved cash flow, and an engaged user base present compelling reasons for investors to closely monitor the company’s developments.
