Shares of Snap (NYSE:SNAP) have rallied by about 80% year-to-date, providing a timely opportunity for investors to head to the exit. The social media company behind Snapchat features a bleak shareholder value destruction track record. The latest quarterly report reveals minimal progress in addressing the ongoing challenges as operating losses persist at elevated levels. The absence of a tangible strategy by management for Snap to emerge from this situation reinforces my bearish stance on the stock.
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Lack of Growth Kills Any Optimistic Prospects
Snap’s money-losing trend could have a chance of being reversed if it weren’t for the company’s lack of sufficient growth. One could make the argument that if Snap were to grow enough to cover its expenses, the company would eventually be able to report a profit.
However, this isn’t the case. Quarter after quarter, Snap keeps posting operating losses. In fact, the company has not recorded a positive operating profit in any quarter in its history. Sadly, this enduring trend signals an ongoing erosion of shareholder value. A look at the company’s Q3 results confirms this outlook.
For the quarter, Snap’s revenue growth turned positive after two consecutive quarters of declining revenues. Specifically, its top line grew by 5% to $1.19 billion, driven by two catalysts. The first is growth in its daily active user count by 12% to 406 million. The second is higher revenues from Snapchat+, the company’s subscription service that offers exclusive, experimental, and pre-release features. Snapchat+ revenues, although not disclosed, grew by more than 250% year-over-year.
Despite the notable surge in revenues and apparent positive strides in user engagement on the platform, the overall outcome is surprisingly lackluster. This disappointment stems from the substantial recovery in the advertising industry during Q3, which should logically have translated into significantly stronger ad revenues for the company.
To put things in perspective, Snap’s industry counterparts, Meta Platforms (NASDAQ:META) and Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), demonstrated considerably more robust financial figures. Meta boasted revenue growth of 23%, while Alphabet’s YouTube, Snap’s closest competitor, achieved noteworthy revenue growth of 13%.
The evident lack of advertiser interest in Snapchat is further underscored by the decline in its average revenue per user (ARPU). Despite Snap’s report indicating a remarkable 200% year-over-year increase in total time spent watching Spotlight, signaling an uptick in user engagement, the company’s ARPU experienced a discouraging 6% dip, settling at just $2.93.
In stark contrast, Meta’s ARPU surged by an impressive 19.3% over the same period, reaching $11.23. This disparity dispels the notion that Snap’s underwhelming performance is a symptom of an industry-wide issue; rather, it is a distinct challenge specific to Snap itself.
Snap Has No Chance of Becoming Profitable
With Snap’s revenue failing to grow substantially to cover its operating expenses, it seems like the company has no chance of becoming profitable.
Snap posted an operating loss of $380.1 million. It’s so hard to grasp that a company that’s been around for so long, operating in a mature space with all of its competitors printing cash, has such a hard time achieving a positive operating profit. And we are not even talking about modest operating losses. $380.1 million in one quarter is a massive operating loss on just $1.31 billion in revenues.
Given its present trajectory, Snap faces significant challenges in preserving shareholder value, as its financially draining operations perpetually require new capital infusion to sustain. The company does have $1.19 billion in cash and equivalents, but eventually, management will have to raise cash again, given the company’s continuous losses.
Opting for debt issuance, particularly in the current economic climate, coupled with creditors’ skepticism toward a money-losing business, would lead to substantial interest expenses. This would further undermine profitability. On the other hand, issuing more stock would result in significant dilution for existing shareholders. It’s a never-ending predicament that Snap seems to have no tangible plan of escaping.
Is SNAP Stock a Buy, According to Analysts?
Wall Street seems to have mixed feelings about the stock, as SNAP features a Hold consensus rating based on three Buys, 20 Holds, and three Sell ratings assigned in the past three months. At $10.55 per share, the average Snap stock forecast suggests 33.7% downside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SNAP stock, the most accurate analyst following the stock (on a one-year timeframe) is Ross Sandler from Barclays, boasting an average return of 46.67% per rating and a 54% success rate.
The Takeaway
In conclusion, Snap’s recent stock rally does little to mask the company’s underlying challenges. Despite some positive indicators, such as revenue growth and increased user engagement, Snap’s persistent operating losses and a lack of a clear strategy for profitability remain significant concerns.
The disappointing performance relative to industry peers and a troubling decline in average revenue per user paints a bleak picture.
With a looming need for additional funding and no apparent escape from its financial predicament, the stock’s recent rally could provide a convenient opportunity for investors to abandon this sinking ship.
