Snap Stock Falters As Growth Slows To Record Low

-Revenue came in at $1.11 billion missing estimates of $1.14 billion by analysts. Revenue grew by 13% y-o-y, the slowest on record.

-Earnings per share came in at -26 cents versus -10 cents during the same quarter in 2021.

-Adjusted EBITDA came in at $7.19 million, meanwhile unadjusted losses came in at $1.24 million.

-Users were up to 347 million beating estimates of 343 million. North American daily active users increased by 4%, European DAU increased by 86 million, and the rest of the world's DAU increased by 35% to 158 million.

-The company announced a $500 million repurchase program to offset dilution.

Snap NYSE: SNAP is an American camera and social media company based out of Santa Monica, California.

Snap’s shares fell in early trading hours as earnings came in slower, growing at a slower pace than previously recorded. Snap is facing increasing competition from competitors and management has re-iterated that the results do not reflect their "ambition."

The CEO noted: “We are evolving our business and strategy to reaccelerate revenue growth, including innovating on our products, investing heavily in our direct response advertising business, and cultivating new sources of revenue to help diversify our topline growth."

Snap’s business continues to grow in North America and Europe but has stumbled elsewhere

North America's average ARPU grew by 7.6% to $8.16. Europe's average revenue grew by 1.5% to $2.11. The rest of the world's ARPU fell by 10%, to $1.05. Meanwhile, Penetration in America was around 25%, 18% in Europe, and 6% in the rest of the world for the quarter.

 Considering the high ARPU in America, many believe that Snap still has a long way to go in Europe and the rest of the world, which should help to continue to push revenue at a high pace during the coming quarters.  But during the current quarter, growth slowed significantly as macroeconomic headwinds and platform policy changes weighed on results. On top of these issues, competition for advertising dollars continues to increase, which is affecting other advertising-focused businesses as well.

Despite the hiccups, Snap’s business model continues to remain robust. Management outlined that key demographic engagement, such as those over 25, grew by 40% y-o-y. Meanwhile, Snap spotlight engagement increase 59% as well. Advertisers will take this into cognizance moving forward as they look to allocate more advertising money towards Snap.

Snap continued to focus on original content and partnerships as it expanded operations in both areas during the quarter. On top of announcing multiple new features, the company continued to expand partnerships with the likes of the NBA and announced multiple original content series. Snap has also partnered with Live Nation to offer concerts and rolled out Snapchat+ in multiple countries during the quarter.

Snap continues to look towards the international market in order to drive revenue and offers multiple local language options and local content with over 500 plus international content partners.

The biggest issue facing Snap is that its user base may not be as monetizable as it previously thought. The content creation business is very competitive and Snap's business model is under pressure. The combination of the two has increasingly caused advertisers to worry about whether they will get the desired return on investment. Snap has done well to integrate advertising well into the platform, but questions remain.

Furthermore, management is cognizant of this issue and has outlined strategies to increase engagement for those who fall within the 25-35 age range. Snap offers for the most part a similar experience to Instagram, but compared to Instagram, it enjoys the loyalty of younger users. This is both a positive and a negative. Should those users remain loyal, brand loyalty will turn into revenue in the future. It remains to be seen how things will turn out in the future.

Snap’s financials and valuation

Snap’s stock is down over 80% from its 52-week high, and now trades at a much more reasonable valuation of 5x sales. Cash flow for the quarter came in at -$147 million as investments in improving the product continued to be high. Cash remains on strong footing as the company currently has over $4.9 billion in cash. Snap’s R&D and marketing spend continue to be the biggest source of operating losses. However, the cost of revenue remains high as well, especially for a company that is not capital intensive. These factors are contributing to the current operating losses, and the company may continue operating losses until it has increased both its global user market penetration and ARPU in key regions.

Snap’s management continues to focus on the fact that it believes that advertisers are moving in the direction of the younger generation as they look to target younger millennials and older Gen X. Whether the strategy is successful is yet to be seen.