Social media giant Snap (SNAP) is living the high life. Earlier this month, SNAP impressed the market with its Q4 2024 earnings results, posting a headline of 443 million daily active users (DAU), far above expectations. Many investors saw this as a major victory over skeptics who consistently question whether Snapchat can stay relevant amid fierce competition. With revenues climbing 12% to $1.5 billion, solid performance in the advertising business, and a promising surge in the firm’s subscription service, now at 11 million users, sentiment may be turning the corner, according to SNAP bulls.
On paper, these metrics paint the picture of a once struggling platform springing back to life, but I fear the bullish case is papering over the cracks. The company is still far from profits, and in a shaky economic backdrop, there is no guarantee that any positive trends will continue. I’m strongly bearish on SNAP, with its buoyant DAU data news coming too little too late to convince me otherwise.
Snapchat’s Spotlight Moment
Even though there are thousands of social media apps out there, Snapchat has always been distinctive enough to stand out. Harnessing features that resonate particularly with Gen Z and Millennials, three-quarters of Snapchat’s DAU is comprised of young adults. This youthful focus, exciting creative tools, and augmented reality (AR) features seem to keep the app fresh, and with user growth exploding in new markets such as India and SE Asia, this could easily continue for some time to come.
Advertising is a major ingredient for SNAP’s success, and with this business unit hauling in almost $1.5 billion in revenue in tandem with Snapchat+ generating $132 million, SNAP’s monetization trajectory is clear. However, despite the goodwill cheer, SNAP still loses ~$250 million every quarter. With AR proving to be an expensive experiment and fierce competition with other platforms for user time and advertisers, I’m not convinced SNAP’s innovative product spurts can sustain the firm’s aspirations, or the market’s valuation for that matter.
Why DAUs Aren’t Enough
The surge in users seems to be great on the face of it, but what matters most is that the vast majority are not meaningfully paying for the service. Although SNAP’s net loss has improved since last year’s Q4 $378 million, SNAP is a long way from sustained profitability. The firm spent a whopping $1.6 billion in operating expenses, while R&D consumed 30% of all revenues for its glitzy AI and AR features. This is not unusual in the sector, with Meta and Pinterest looking at similar ideas, but both of these companies are now meaningfully profitable, giving stability and flexibility for such product tinkering.
If Snapchat is overly reliant on the youthful demographic, then the enormous investment from competition in the form of Instagram Reels, TikTok, and Threads could easily see an erosion in users over the coming quarters. There is also risk to be found on the macro front. If the company’s revenues are dependent on advertising dollars related to strong macroeconomic activity, then existing uncertainty over inflation and a disfavorable interest rate landscape could pull down discretionary spending even further and impact ad-sensitive firms like SNAP. A similar scenario played out for SNAP in 2022 as shares skittled from $50 to below $10 per share on the back of weakening macro factors unrelated to SNAP.
What are SNAP Stock Bulls Saying?
Despite my strong bearish stance, it’s always important to consider what the other side thinks. In other words, what are the bulls thinking, and why are they bullish in the first place? Good investors consider their investment case well. Great investors consider multiple investment cases while critically analyzing the validity of each.
There are plenty of optimists out there with SNAP, and after such a fall in the share price, there are bound to be bottom-pickers looking for a bargain. SNAP has taken advantage of uncertainty in TikTok’s future in the U.S. and adopted features that have become popular, such as the platform’s Spotlight feature, similar to TikTok.
The bulls contend that revenues are up while losses are shrinking. Meanwhile, the subscription service is still attracting new users, so there is every reason to think as long as user momentum continues, then the share price can continue to swell. At a forward P/S of just 3.2 times, well ahead of the competition, Snap looks fairly cheap, and if the TikTok ban metastasizes into a precedent, it could send droves of users, including their ad dollars, SNAP’s way.
However, I remain skeptical, as do others. The bullish scenario requires a notoriously volatile sector to become more stable while the U.S. economy must discover a growth spurt that includes lower interest rates and significantly more ad spend. SNAP also needs ongoing geopolitical trends to move in the company’s favor, which, in effect, means that Donald Trump has to stop making geopolitical waves and roiling market sentiment with every speech he makes. Given the confluence of current factors, I’m not counting on it.
SNAP’s Valuation Blues
The most likely scenario for SNAP is that its revenue growth will likely slow down as competition chips away at SNAP’s DAU over time. However, the alternative scenario is that revenues grow at ~10%, with DAUs holding steady, and the share price appreciates to $13. Then, there’s the bullish thesis that revenues will continue to surge, Snapchat+ will grow healthily, and the market capitalization will exceed $32 billion, sending shares above $20.
Of the three, the bearish case feels more realistic, with advertising likely to slow, rivals closing the gap on younger user usage, and massive investments in AR/AI producing similar results for all market entrants.
Is SNAP a Buy or a Sell?
SNAP is neither a buy nor a sell right now because Wall Street is broadly neutral on Snapchat stock. Snapchat stock carries a Hold consensus rating based on six Buy, 24 Hold, and one Sell ratings attained over the past three months. According to Wall Street analysts, SNAP’s average price target of $13.27 per share implies approximately 30% upside potential over the next twelve months.
It’s Too Little Too Late to Snap Up Snapchat Stock
Snapchat’s 2025 strategy seems to hinge on building upon the DAU strength with exciting new features. However, CEO Evan Spiegel’s long-term bets feel more like gimmicks unless tangible monetization plans can be demonstrated and executed. While the future of SNAP’s share price largely depends on the U.S. economy, management will do all it can to keep the platform distinctive and popular. I just don’t see it moving close enough to profit any time soon for my risk appetite. That said, plenty of opportunities could lie ahead for the right investor, with a healthy dose of reality and a sensible approach to risk.