Snap stock can’t be bought until these 4 issues are resolved

Are you considering a stake in Snapchat’s parent company? snap (snap -1.70%) After February’s performance setback? It’s not a terrible strategy. It’s a good idea to buy good stocks when they’re on sale. Now down to a third of its February high, Snap stock is clearly on sale.

But before you can capitalize on Snap’s failure as a long-term buying opportunity, four issues need to be addressed first.

Introduction to Snap

You know the company and, more specifically, its apps. Snapchat is a social media platform best known for allowing users to customize photos (and videos) and share them with friends and followers. As of the fourth quarter of last year, 414 million people are using this app every day.

The branch in question was fine. The user base grew, but fell short of expectations, with a peak of $1.38 billion in the three months ended December, with little growth. Earnings per share of $0.08 beat expectations of $0.06, but was still lower than earnings per share of $0.14 in the comparable quarter a year ago. Sales guidance for the first quarter of the first fiscal year was also poor, and the recent announcement that it would lay off about 500 people (about 10% of the workforce) made investors even more anxious.

But these are all just symptoms. The underlying problem is what must be addressed for symptoms to be alleviated. At the heart of Snap’s current problems are four major challenges:

1. Snapchat needs more top-performing users.

Snapchat’s daily users grew to 414 million in the fourth quarter, and an additional 8 million in the third quarter. However, these numbers have not increased uniformly. Most of this growth occurred outside North America and Europe. In fact, the app lost part of its domestic user base during the fourth quarter of last year.

So what? Does it really matter? where Do these users live?

Indeed it is. North American users boast the highest average revenue per user (ARPU) at $8.96 per quarter. This is a slight increase compared to the previous year. The “rest of the world” ARPU is much smaller at $1.03 per quarter. Under The Q4 2022 figure is $1.10. Q4 ARPU in Europe increased slightly by 5% to $2.49 per quarter, but Snapchat added only 1 million daily users (net) in Europe in the final three months of 2023.

Data source: Snap’s Q4 2023 earnings slide deck.

In other words, Snapchat isn’t growing where it matters most.

2. Spending must be effective, but it must also be implemented.

Kudos to Snap for being disciplined enough to not spend money recklessly in the name of growth. Last year’s total operating costs and expenditures were basically consistent with 2022.

But it’s arguable that the right move right now might actually be to spend a little more to get a little bit of growth. any Growth – Go. Last year’s revenue was similar to the 2022 tally.

The company is still collecting costs. The ongoing layoffs will likely lead to a loss in earnings before interest, taxes, depreciation, and amortization (EBITDA) of between $55 million and $95 million for the quarter ending in March. In the second quarter.

Still, management doesn’t seem entirely convinced that these job cuts and other plans will actually result in meaningful, sustained top and bottom line growth. CFO Derek Andersen commented on the company’s fourth quarter earnings call in February: “After restructuring on the OPEX (operating expenditure) side and freeing up significant scale in our overall fixed cost cash cost structure… it’s important to be disciplined here. I expect we can do that. And the changes we’ve made are “It gives us room to invest to support growth as we accelerate our returns.”

It’s hopeful, but hardly inspiring.

Connect the dots. As Snap struggles to find an effective and sustainable spending plan, it’s unclear when, or even if, the company will emerge from the red.

3. Snap still doesn’t seem to know how to best monetize Snapchat.

All great companies are adaptable. But not every company that adapts is necessarily great. If a company is still thinking about its core product more than 10 years after its launch, it probably was never marketable at all.

Arguably, this is where Snap is now.

Snapchat launched in 2011, but the types of advertising it has historically used are now undergoing major changes. Chief among these changes is the shift from simple brand awareness advertising to direct response advertising.

Perhaps worse is that revenue growth appears to be slowing as Snap continues this transformation. First quarter revenue growth guidance is between 11% and 15%, which looks and feels impressive as it compares to the unusually weak first quarter of 2023.

SNAP Revenue (Quarterly) Data by YCharts

That’s a red flag because you’d think the company, now 13 years old, might have already followed the lead of Facebook and X in making such changes.

4. Snapchat lacks scale and reach compared to other web advertising platforms.

Finally, a $19 billion company that does about $5 billion in business annually cannot be considered “small” compared to other web advertising platforms, such as: meta platform‘Facebook or alphabetGoogle, Snapchat is minuscule. Facebook reports that it has more than 2.1 billion daily users.

It’s not necessarily the end of the world. Small companies can do well despite their size. But it’s clear that Snap isn’t performing as well as similar names.

LightShed Partners analyst Rich Greenfield asked this candid question during a February conference call:

() Is Snap’s small size compared to Meta… some kind of fundamental, long-term problem? Because people think they’re seeing the meta grow 30% on a massive base scale… is a dramatic acceleration possible throughout the year, leaning on DR (direct response) and ML (machine learning) investments? turn off? Or are you fundamentally at a disadvantage?

It’s not just Meta’s Facebook that’s outpacing Snapchat. Amazon‘s advertising business grew 27% during the fourth quarter. YouTube’s ad revenue grew 15.5% year-over-year, while Google’s search ad revenue rose nearly 13% in the fourth quarter of last year. Potential advertisers are likely looking for platforms that offer broader reach and deeper engagement.

I never say never, but definitely not now.

The good news is that none of these challenges are insurmountable. Snap may solve these four problems in the near future. The bad news is that all of these challenges are difficult to solve.

Snapchat is now 12 years old and is still trying to figure out how to make real money. This is not the kind of company you want to take significant risk on just yet. In fact, most investors probably won’t want to invest in Snap at all until most of these issues are resolved.